Raising The Retirement Age: Can It Balance Budgets?

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As state and federal lawmakers search for ways to reduce government spending, some economists are urging them to raise the retirement age to ease budget pressures.

If Americans were to work longer, they would pay more in taxes, and at the same time reduce the cost of government pensions and Social Security benefits, according to these economists.

Older Workers According to the Bureau of Labor Statistics, the unemployment rate for people over age 55 has been running at the highest levels in decades. BLS: Unemployment Rates For Workers, By Age

But others disagree. They say the fast-moving 21st century economy doesn't need older workers as much as it needs young workers with the latest job skills.

While the two sides disagree on the solutions, no one disputes the fundamental problem: demographics. The U.S. population is aging, and that means there will be fewer active workers paying taxes, and more retirees collecting benefits.

One recent study by the American Enterprise Institute, a conservative research group, showed that if the eligibility age for early benefits were raised from 62 to 65, the Social Security system would be in much better financial shape.

In fact, the whole U.S. economy would get a boost from having people work and pay taxes longer. In an age when fewer and fewer jobs require great physical strength, it makes sense to move up the retirement age, according to the AEI study's author, Andrew G. Biggs.

Raising the age for early retirement "could encourage Americans to remain in the workforce longer, significantly increasing their retirement income, boosting economic output, and increasing tax revenues," Biggs wrote in his conclusion. Longer work lives "would generate significant benefits to the economy, the federal budget and, most importantly, individuals' own retirement security."

But other economists say that for people to retire later, they need a job in the first place — and many older workers don't have one.

Since the Great Recession began, the unemployment rate among people over 55 has been at the highest levels in more than 60 years. When companies started laying off workers in massive waves in 2008 and 2009, millions of baby boomers lost their jobs and haven't been able to find their way back into the workforce.

Many of them have decided to file for early Social Security benefits. In 2007, before the recession hit, 38 percent of 62-year-olds asked for their benefits. By 2009, the figure was up to 42 percent.

Some economists conclude that raising the early retirement age would not keep people working and paying taxes longer — it would just increase the level of poverty among people in their mid 60s who could neither find jobs nor collect Social Security benefits.

"Many workers retire because they can't find jobs. They're unemployed — or expect to become so," James K. Galbraith, an economist at the University of Texas at Austin, wrote in a recent essay that has stirred up a controversy about early retirement. "Extending the retirement age for them just means a longer job search, a futile waste of time and effort."

Instead of focusing on cutting costs by making people work longer, government leaders should be trying to boost the tax revenues generated by highly productive, innovative companies, the argument goes. In today's competitive, globalized economy, U.S. companies should be hiring fewer but better educated workers, Galbraith argues.

"We are not going to find 11 million new jobs soon," Galbraith wrote in Foreign Policy magazine. "So common sense suggests we should make some decisions about who should have the first crack: older people, who have already worked three or four decades at hard jobs? Or younger people, many just out of school, with fresh skills and ambitions?"