The Unemployment Effects of Proposed Changes in Social Security's "Normal Retirement Age"

By Michello, Franklin A.; Ford, William F. | Business Economics, April 2006 | Go to article overview

The Unemployment Effects of Proposed Changes in Social Security's "Normal Retirement Age"


Michello, Franklin A., Ford, William F., Business Economics


This paper identifies and analyzes an inherent conflict between some proposed U. S. Social Security reform measures, which would encourage delayed retirement decisions, and the objective of minimizing the economy's unemployment rate. Using recent demographic trends in the age composition of the U.S. labor force, the study suggests that such proposed U.S. Social Security reform measures may actually increase the economy's unemployment rate. It concludes that measures to encourage older workers would relieve labor market pressures (while also helping the Social Security system) if and only if unemployment was persistently near the non-accelerating inflation rate of unemployment (NAIRU). However, in an economy with above NAIRU unemployment, which has been the case most often in recent years, the opposite Social Security policy logic would apply.

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The U.S. Old-Age, Survivors and Disability Insurance program, commonly known as Social Security, currently provides benefits to over 46 million people in the United States, about one out of every six Americans. Most recipients (63 percent) are retired workers. The rest are spouses and children of deceased workers (15 percent), people with disabilities who have not reached retirement age (12 percent), and spouses and children of retired or disabled workers (10 percent).

Monthly benefit checks in 2003 averaged about $903 for all individuals and $1,492 for all retired workers and their spouses. Full benefits are currently available to those who retire at age 66. However, this age is adjusted upward, incrementally, to 67 for those born in and after 1960. Reduced benefits are also currently available for those who retire as early as age 62. Overall benefit levels are also increased each year to compensate for inflation, as measured by a wage index, CPI-W. (1)

Social security is funded through a 12.4 percent payroll tax divided evenly between employees and employers (6.2 percent each). The tax is currently applied to wages up to $94,200 (January, 2006), with no taxes levied on wages earned above that amount. Social Security taxes are not assessed against investment-related or other non-wage income.

The paper summarizes and assesses recent research on the ways in which changes in the normal retirement age (NRA) may affect the unemployment rate. In particular, it identifies and analyzes a macro trade-off--possibly quite negative--between "reforming" Social Security to prolong its solvency and the effects such reforms could have on the unemployment rate, gross domestic product (GDP) growth, and hence on Social Security.

An important issue in the debate over the proposals to raise the NRA is whether that would increase the unemployment rate, since older workers by delaying their retirement, may prevent younger unemployed workers from finding a job. Using recent demographic trends in the age composition of the U.S. labor force, the paper suggests that such proposed U.S. Social Security reform measures may actually increase the economy's unemployment rate. It concludes that if the U.S. economy were persistently robust with unemployment near NAIRU and the risk of inflation high, then measures might be taken to encourage older workers to work longer to relieve market pressures while also helping the Social Security system. However, in an economy with above-NAIRU unemployment, which has been the case most often in recent years, the opposite Social Security policy logic would apply.

The rest of the paper is organized as follows: a historical overview of the NRA issues, discussion of the current eligibility rules, a review of proposals to raise the NRA, the public's response to raising the NRA, employer views about raising the retirement age, discussion of the measured unemployment rate, an illustration of how NRA increases may affect the unemployment rate, and a summary and conclusion.

Background Issues

Thinking and actions directed toward relieving the financial pressures on Social Security have evolved out of concern for the system's long-term solvency. …

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