What's a 'fair' retirement age?

As we live longer, the amount of time we are able to spend in retirement grows. And 10,000 baby boomers will turn 65 every day for the next two decades. Those simple demographic facts are major drivers behind Social Security's fiscal challenges.

The retirement program is getting a lot of attention in this election year and one prescription put forward for partly fixing its finances would extend the retirement age. But a recent study argues that extending the retirement age across the board for all puts more of a squeeze on less well-off workers compared to wealthier workers.

Geoffrey Sanzenbacher, who is lead researcher at the Center for Retirement Research at Boston College, said that because less well-off retirees have lower life expectancy, they will have the least time to enjoy their retirement benefits. "Social Security and Medicare are designed to be progressive programs. These trends threaten that progressivity," he asserted.

Changes to Social Security in the past boosted the full retirement age (when 100 percent of benefits are paid) based on a person's year of birth. Retirement age now ranges from age 65 to as much as age 67 for those born in 1960 or later. So current proposals to extend the retirement age for younger workers have precedents. Doing so would shrink the ratio of time spent in retirement vs. time spent in the workforce and presumably shorten the time spent collecting Social Security and Medicare benefits. The math makes it sound callous, but it is an approach that makes sense as life expectancy has been growing for decades and people are staying in the workforce longer.

Take a deep breath. What follows is a brief summary of what the researchers found.

Sanzenbacher and colleagues studied life expectancy based on the level of educational attainment, which is also highly correlated to socio-economic status. Using U.S. Census data on wealth and income matched to data from death certificates obtained from the National Center for Health Statistics, the researchers estimated the increase in mortality inequality between 1979 and 2011.

While life expectancy increased for all (grouped into four quartiles of 25 percent each), they found improvements from 1979-2011 for the least educated men and women averaged 1.5 percent and 0.5 percent per year, compared to 2.5 percent and 1.2 percent per year for the most educated. The researchers used these results to estimate how much longer each group could stay in the workforce at today's longer life expectancies while maintaining the same ratio of retirement years to working years as existed in 1979.

The data on women showed a gap of 1.2 years to hold the ratio the same as 1979, with retirement for the least educated at age 66, while the most educated women would retire at age 67.2 years, the only quartile of women above the current retirement age.

The researchers used educational attainment rather than directly studying life expectancy based on income or wealth, because wealth and health affect each other in complex ways. A person can experience poor health outcomes because lack of income limits access to health care, but poor health can also limit one's earning ability. Educational attainment avoids those complications, Sanzenbacher explained.

While that's a lot of statistics to chew on, it boils down to one simple conclusion, Sanzenbacher argued. Across-the-board proposals to extend the retirement age widen the gap in benefits between wealthier and less well-off retirees, which he described as unfair.

As presidential candidates offer their policy proposals, Sanzenbacher offered an alternative approach. "You could imagine basing retirement age around average monthly income over a person's lifetime earnings history," he said. "As we think about pushing retirement age back, I think we could easily differentiate and [not] push back uniformly."

He acknowledged that his policy prescription may fall on deaf ears in the current climate. "Given the finances of Social Security … issues other than just fairness" may dominate the debate. "But it certainly seems unfair to treat everybody the same to deal with Social Security's shortfall."