Raising The Retirement Ages Would Have Implications For Older Workers And SSA Disability Rolls

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GAO REPORT

November 18, 2010

GAO REPORT

GAO-11-125

SOCIAL SECURITY REFORM

RAISING THE RETIREMENT AGES WOULD HAVE IMPLICATIONS FOR

OLDER WORKERS AND SSA DISABILITY ROLLS

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copyright or other notice from copies of the content.GAO-11-125

Social Security Reform: Raising the Retirement Ages Would Have Implications for Older Workers and SSA Disability Rolls

November 18, 2010

The Honorable Herb Kohl Chairman Special Committee on Aging United States Senate

Dear Mr. Chairman:

Life expectancy has increased over the last several decades, and by 2050 persons age 65 or older will account for more than 20 percent of the total U.S. population, up from about 13 percent in 2000. Without significant changes in retirement decisions, these improvements in longevity are expected to lengthen the average number of years that Americans spend in retirement and contribute to the expected long-term revenue shortfall in the trust funds for Social Security`s Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) programs (collectively knows as OASDI). The 2010 report from the Social Security Board of Trustees projects that the trust funds` assets will be exhausted by 2037.

In light of the long-term trust fund solvency issues and increased longevity, many have suggested changing the earliest eligibility age (EEA) at which workers first qualify for retirement benefits, the full retirement age (FRA) at which they receive full benefits, or both.2 By reducing monthly benefits for those taking early benefits or delaying eligibility, raising the retirement ages could create an incentive for workers to delay retirement, thus earning more income and possibly saving more for retirement. However, raising the retirement ages would likely increase the number of workers applying for and receiving DI benefits. More DI applications and beneficiaries would reduce some of the financial savings for the combined OASI and DI trust funds and increase the Social Security Administration`s (SSA) disability caseload, which already faces a serious backlog.3 Further, higher retirement ages would mean that many workers in their sixties would have to wait to receive retirement benefits or receive lower benefits. As a result, this could create a financial hardship for those who cannot continue to work because of poor health or demanding workplace conditions, but do not qualify for DI or Supplemental Security Income (SSI), a separate assistance program administered by SSA for certain people with limited income and assets.

In this context, you asked us to address issues related to the potential impact of raising the EEA or FRA on the DI program and on older workers in general, workers in their sixties, but in particular those approaching age 62, just prior to becoming eligible for retirement benefits. This report answers the following questions: 1) What do the health, occupational, and demographic characteristics of those near retirement age indicate about the potential for these individuals to continue working at older ages? 2) What is known about the effect a change in Social Security`s EEA and FRA could have on retirement and disability benefits and applications for disability? 3) What policy options might help mitigate the effects of increased retirement ages on those who may not be able to work longer?

To address these objectives, we

— conducted an analysis of data on older workers using the Health and Retirement Study (HRS);4

— reviewed selected studies of health, occupational, demographic, and financial conditions of older workers;

— reviewed selected studies of the impact of changing the retirement age;

— reviewed relevant federal laws and regulations;

— interviewed SSA officials and reviewed related agency data; and

— interviewed experts and reviewed literature to identify potential policy options that have been proposed to mitigate the effects of raising the retirement ages on older workers. We do not intend the options identified by the experts we interviewed or identified in our research to be an exhaustive list. In addition, we did not assess or evaluate the potential policy options that were proposed to mitigate any potential impacts of a change in the retirement age, nor do we necessarily recommend any such options. We found the data to be sufficiently reliable for the objectives of this report.

We conducted this performance audit from May 2010 to October 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

On October 21, 2010, we briefed your staff on the results of our analysis. We have also updated the enclosed slides after the date of our original briefing. (See appendix I for the briefing slides.) This report formally conveys the information provided during this briefing. In summary:

— While general improvements in longevity, health, and workplace conditions over recent decades suggest that most workers would be capable of working to a later retirement age, many older workers would face health or physical challenges that could prevent them from working longer.5 According to our analysis of preretirement age individuals using the HRS, about one-quarter of age 60-61 workers those just prior to early retirement eligibility and most likely to be impacted by a change in retirement age from 1998 to 2008 reported a work-limiting health condition, and about two- thirds of those who work report having a job that is physically demanding. Also, those workers who might have more difficulty working to an older retirement age have less education and lower household income than those who do not report health limitations. Disability rates increase with age, suggesting that workers postponing retirement would face increasing likelihood of becoming disabled. Even healthy older workers may have trouble staying in the labor force longer, as those that lose their jobs are less likely than younger workers to get rehired.

— Raising the EEA or FRA could increase the number of applications to and beneficiaries of DI and other assistance programs, as well as change retirement benefits. Raising the EEA would postpone eligibility for retirement benefits and could cause some older individuals with work-limiting health conditions to apply for DI instead of waiting to claim retirement. Raising the FRA reduces retirement benefits for individuals who retire early, and could create a financial incentive to apply for DI benefits, which are not reduced. A few researchers have begun to study the effects of the prior increase in the FRA, and two studies conclude that the increase has led to more DI applications. SSA actuaries estimate that raising the FRA further would increase the number of DI beneficiaries. With respect to the OASDI trust funds, the actuaries project that raising the FRA would improve solvency, but raising the EEA alone would worsen solvency.6

— Experts we interviewed indicated that modifications to the DI program and policy changes that provide alternative income support for low-income workers or employment support could help older workers who are unable to work, do not qualify for DI benefits, and are unable to receive enough support from existing programs. While existing programs like unemployment insurance and workers` compensation could provide some support for older workers, they are generally of limited duration and not everyone may qualify. Some proposals to support older workers include modifying the DI program, such as by allowing determinations of “partial disability“ similar to how the Veterans Administration determines disability. According to SSA, however, this would be a major change, and SSA would expend significant resources in making such modifications to the DI program. Other proposals include options for income support in the absence of DI, such as setting different EEA`s for workers based upon lifetime earnings, with lower earners having an earlier eligibility age; however, this policy may not specifically target workers who experience a disabling condition. In addition, tax incentives for employers and workers to encourage employment for older workers or those with disabilities such as an earned income tax credit for older workers with a disability or early intervention return-to-work support could keep some older workers in the workforce and deter them from applying for DI benefits. However, any proposal to mitigate the impacts of a higher retirement age would increase benefit costs, either within DI or in other assistance programs.

Raising the EEA would likely have larger effects than a comparable rise in the FRA on retirement decisions, DI applications and awards, and on vulnerable older workers because it would remove the age-62 early retirement option, as opposed to lowering benefits for all early retirees. Changes in the retirement age could conceivably improve retirement security for able-bodied workers if they cause them to work longer and save more for retirement, but it could worsen security for those unable to do so. In addition, an FRA increase by itself could also hurt the retirement security if workers continue to retire at age 62 and do not have a clear understanding of the monthly benefit reductions. While policy options exist to mitigate the impact on affected workers, doing so will likely require expanding programs and increase benefit costs. Finding the balance between worker protections and costs will likely be challenging.

Agency Comments and Our Evaluation

We provided a draft of this report to SSA for its review and comment. They provided us technical comments, which we have incorporated as appropriate.

We are sending copies of this report to relevant congressional committees. In addition, this report will be available at no charge on GAO`s Web site at www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-7215 or bertonid®gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix III.

Sincerely yours,

Daniel Bertoni Director, Education, Workforce, and Income Security Issues