Social Security Reform: Implications of Raising the Retirement Age
(Letter Report, 08/27/1999, GAO/HEHS-99-112).

Pursuant to a congressional request, GAO provided information on the
potential costs and benefits associated with higher retirement ages,
focusing on: (1) Old-Age and Survivors Insurance (OASI) and Disability
Insurance (DI) Trust Funds and the Supplemental Security Income (SSI)
program; (2) the labor market for older workers; and (3) vulnerable
population groups such as blue-collar workers and minorities.

GAO noted that: (1) raising the normal retirement age (NRA) or earliest
eligibility age (EEA), or both, could have substantial net positive
effects on the financial integrity of the OASDI Trust Funds by reducing
the retirement benefits paid out and increasing the payroll taxes
collected; (2) the extent of the improvement in solvency would depend on
how high and how quickly the ages were raised, particularly the NRA, and
how workers alter their retirement behavior in response to the change;
(3) raising the retirement ages might also contribute to economic growth
because workers would be likely to extend their careers; (4) however,
raising the retirement ages could increase DI and SSI caseloads; (5)
more older workers would be likely to apply for disability benefits
because benefits for retired workers would fall relative to these
programs' benefits for the disabled, and a greater number of employed
older workers would lead to a greater number of DI participants; (6)
according to GAO's estimates, however, the increases in DI participation
and the associated increases in DI payments should not offset a
substantial amount of the cost savings that would accrue to the OASI
portion of the Social Security Trust Funds; (7) raising the retirement
ages would likely increase the number of older workers in the labor
force, as more workers would be employed for longer periods of time; (8)
the magnitude of this increase would depend on whether the EEA, the NRA,
or both were raised; (9) another key factor is the size of the increase
in the EEA or the NRA and the transition period allowed for the changes
to be implemented; (10) changes in the retirement ages could have a
potentially substantial effect on the decisions of older workers to
remain in the labor force if they were implemented quickly; (11) the
total population of persons aged 55 to 64 is expected to grow, creating
the potential for a significant increase in the number of persons in
this age group in the labor force; (12) increasing the number of older
workers in the labor force, however, could also create the potential for
additional unemployment; (13) although the health of the older
population has generally improved, some groups of older workers--those
who are less healthy and those in blue-collar occupations--may face
significant barriers to continued employment; (14) these obstacles could
be the most severe for African American and Hispanic workers; (15)
individual proposals such as raising the retirement ages are often part
of more comprehensive proposals to reform the Social Security system;
and (16) in this context, an understanding of the cumulative effects of
an entire reform proposal is essential to prevent any adverse effects
from falling disproportionately on a single vulnerable population.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-99-112
     TITLE:  Social Security Reform: Implications of Raising the
	     Retirement Age
      DATE:  08/27/1999
   SUBJECT:  Social security benefits
	     Disability benefits
	     Retirement benefits
	     Eligibility criteria
	     Income maintenance programs
	     Labor force
	     Labor statistics
	     Health statistics
IDENTIFIER:  Old Age Survivors and Disability Insurance Program
	     Supplemental Security Income Program
	     Social Security Trust Fund
	     Social Security Program
	     Medicaid Program
	     SSI
	     Old Age and Survivors Insurance Trust Fund

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Cover
================================================================ COVER

Report to the Chairman and Ranking Minority Member, Special Committee
on Aging, U.S.  Senate

August 1999

SOCIAL SECURITY REFORM -
IMPLICATIONS OF RAISING THE
RETIREMENT AGE

GAO/HEHS-99-112

Raising the Retirement Age

(207046)

Abbreviations
=============================================================== ABBREV

  AARP - test
  ADEA - Age Discrimination in Employment Act of 1986
  DI - Disability Insurance
  DRC - delayed retirement credit
  EBRI - test
  EBRI-SSASIM2 - test
  EEA - earliest eligibility age
  HHS - Department of Health and Human Services
  HRS - Health and Retirement Survey
  NRA - normal retirement age
  OASDI - Old-Age, Survivors, and Disability Insurance
  OASI - Old-Age and Survivors Insurance
  SSA - Social Security Administration
  SSI - Supplemental Security Income

Letter
=============================================================== LETTER

B-282269

August 27, 1999

The Honorable Charles E.  Grassley, Chairman
The Honorable John Breaux, Ranking Minority Member
Special Committee on Aging
United States Senate

Americans are now living longer than ever.  Since 1940, the
additional life expectancy at 65 years of age has increased 38
percent, and men and women born in 1997 can expect to live 73 years
and 79 years, respectively.  This growth in longevity has contributed
to Social Security's projected $3 trillion financial shortfall over
the next 75 years by lengthening the period during which retirees
receive benefits.  The Congress has introduced numerous proposals
addressing Social Security's financial difficulties, many of which
would represent comprehensive reforms of the program.  Several
proposals focus on raising the normal retirement age (NRA) beyond 67
and some would also raise the earliest eligibility age (EEA) beyond
62.  The Congress already approved a change in the retirement age in
1983 when it enacted legislation that phased in an increase in the
NRA from 65 to 67 over a 22-year period beginning in 2000. 

In light of the potential costs and benefits associated with higher
retirement ages, you requested that we assess how raising retirement
ages could affect (1) the Old-Age and Survivors Insurance (OASI) and
Disability Insurance (DI) Trust Funds and the Supplemental Security
Income (SSI) program, (2) the labor market for older workers, and (3)
vulnerable population groups such as blue-collar workers and
minorities.\1 We presented preliminary findings on these issues in
July 1998.\2 In this report, we expand upon that testimony by
providing additional information on the potential effect of raising
the retirement ages on the Social Security Trust Funds and the
challenges facing certain older workers in extending their work
lives. 

To meet our objectives, we analyzed a nationally representative data
set--the Health and Retirement Survey (HRS) compiled by the Institute
for Social Research of the University of Michigan--and data from SSA. 
Because of the extensive use by, and the widespread familiarity of,
researchers with these databases, we did not verify the accuracy of
the data.  We also interviewed experts in retirement behavior and
conducted a thorough review of the relevant literature.  To assess
the effects of retirement age increases on trust fund solvency, we
used a policy simulation model (EBRI-SSASIM2).\3

We conducted our work between March 1998 and May 1999 in accordance
with generally accepted government auditing standards. 

--------------------
\1 The OASI program of the Social Security system provides monthly
cash benefits to retired workers and their dependents and survivors. 
Benefits are paid from the OASI Trust Fund, which is financed
primarily by payroll taxes.  The DI program of the Social Security
system provides monthly cash benefits to workers who, having worked
long enough and recently enough to be insured, become disabled and
unable to work.  The Social Security Administration (SSA) considers a
person to be disabled when he or she is not only unable to do his or
her previous work but, considering his or her age, education, and
work experience, is also unable to do any other kind of substantial
work.  Benefits are paid from the DI Trust Fund, which is financed
primarily by payroll taxes.  The OASI and DI Trust Funds are
collectively referred to as the Old-Age, Survivors, and Disability
Insurance (OASDI) Trust Funds or Social Security Trust Funds.  SSI is
a means-tested, federally administered income assistance program that
is financed by general tax dollars.  The program was authorized by
title XVI of the Social Security Act and began paying benefits in
1974.  SSI provides monthly cash payments in accordance with uniform,
nationwide eligibility requirements to needy aged, blind, and
disabled persons. 

\2 Social Security Reform:  Raising Retirement Ages Improves Program
Solvency but May Cause Hardship for Some (GAO/T-HEHS-98-207, July 15,
1998). 

\3 The EBRI-SSASIM2 model, developed by the Policy Simulation Group
with funding from the Employee Benefit Research Institute, is
designed to closely approximate cost and benefit projections
calculated by the Social Security Office of the Chief Actuary.  See
appendix I for a discussion of the model. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Raising the normal or earliest eligibility age or both could have
substantial net positive effects on the financial integrity of the
OASDI Trust Funds by reducing the retirement benefits paid out and
increasing the payroll taxes collected.  The extent of the
improvement in solvency would depend on how high and how quickly the
ages were raised, particularly with the NRA, and how workers alter
their retirement behavior in response to the change.  Raising the
retirement ages might also contribute to economic growth because
workers would be likely to extend their careers.  However, raising
the retirement ages could increase DI and SSI caseloads.  More older
workers would be likely to apply for disability benefits because
benefits for retired workers would fall relative to these programs'
benefits for the disabled, and a greater number of employed older
workers would lead to a greater number of DI participants.  According
to our estimates, however, the increases in DI participation and the
associated increases in DI payments should not offset a substantial
amount of the cost savings that would accrue to the OASI portion of
the Social Security Trust Funds.\4

Raising the retirement ages would increase the number of older
workers in the labor force, as more workers would be employed for
longer periods of time.  The magnitude of this increase would depend
on whether the EEA, the NRA, or both were raised.  Another key factor
is the size of the increase in the EEA or the NRA and the transition
period allowed for the changes to be implemented.  Changes in the
retirement ages could have a potentially substantial effect on the
decisions of older workers to remain in the labor force if they were
implemented quickly.  The total population of persons aged 55 to 64
is expected to grow from 21 million to 30 million over the next
decade as the baby boom generation ages, creating the potential for a
significant increase in the number of persons in this age group in
the labor force, currently approximately 12 million. 

Increasing the number of older workers in the labor force, however,
could also create the potential for additional unemployment.  For
example, although the health of the older population has generally
improved, some groups of older workers--those who are less healthy
and those in blue-collar occupations--may face significant barriers
to continued employment.  These obstacles could be most severe for
African American and Hispanic workers, who are the most likely to be
in blue-collar occupations and to experience unemployment.\5 Current
unemployment rates for African American and Hispanic workers aged 53
to 63 are about twice as large as those for older white workers. 
However, individual proposals such as raising the retirement ages are
often part of more comprehensive proposals to reform the Social
Security system.  In this context, an understanding of the cumulative
effects of an entire reform proposal is essential to prevent any
adverse effects from falling disproportionately on a single
vulnerable population. 

--------------------
\4 Because SSI is financed through general revenues, it does not have
a direct effect on the OASDI Trust Funds. 

\5 Most of the data sources we relied on used the terms African
American, white, and Hispanic.  Therefore, for the remainder of this
report we use the same terms.  Although we recognize that there are
other racial groups, such as Asians and Native Americans, for the
most part the data were not broken down finely enough for us to look
at them separately. 

   BACKGROUND
------------------------------------------------------------ Letter :2

The Social Security program is the foundation of the nation's
retirement system, providing benefits to retired and disabled workers
and their dependents and survivors.  The original Social Security Act
first established old-age benefits for retired workers in 1935. 
Benefits for dependents and survivors were added in 1939 and benefits
for disabled workers were added in 1956.  The primary source of
revenue for OASI and DI Trust Funds is the payroll tax paid by
workers covered by the program and their employers.  Currently, an
estimated 96 percent of the nation's workforce is covered by Social
Security. 

Originally, the Social Security Act established 65 as the minimum age
at which retirement benefits could be obtained.  This age was
selected as a compromise between 60, which appeared to be too low an
age from a cost standpoint, and 70, which appeared to be too high
given that life expectancy at birth in 1935 was 59 years for men and
63 years for women.  Since 1956, women have had the option to take
reduced benefits at age 62, and since 1961, this option has also been
available to men.  As a result, 62 has been defined as the EEA and 65
as the NRA.  In an effort to improve Social Security's financial
condition, the Congress approved a change in the retirement age in
1983 when it enacted legislation that phased in an increase in the
NRA to 67 over a 22-year period beginning in 2000. 

The Social Security Trust Funds have a projected financial shortfall
or funding gap of approximately $3 trillion over the next 75 years. 
This long-term financing problem is largely a result of greater life
expectancy, lower birth rates, and the forthcoming retirement of the
baby-boom generation (persons born from 1946 through 1964).  Social
Security is financed primarily on a pay-as-you-go method, which means
that current workers pay current retirees' benefits.  In 1997, there
were approximately 3.4 workers for every beneficiary, and by 2030
this number is projected to fall to 2.1.  Thus, in the foreseeable
future relatively fewer people will be paying into the system and
more people will be drawing benefits. 

Legislative proposals introduced during the 105\th Congress (1997-98)
and 106\th Congress (1999-2000) would raise the retirement ages
faster and higher than the increases mandated in 1983.  These
proposals are being driven by the recognition that people are living
longer and spending a growing proportion of their lives in
retirement.  In 1940, the first year Social Security benefits were
paid, men and women aged 20 were expected to receive benefits for 7
years and 9 years, respectively, if they retired at the NRA.\6

This expected benefit period has now climbed to 12 years for men
and 17 years for women and is projected to increase further over the
next several decades.  (See figure 1.) Raising retirement ages would
alter this trend toward drawing benefits for an increasing portion of
one's lifetime. 

   Figure 1:  The Expected Number
   of Years Men and Women Will
   Receive Social Security
   Benefits If They Retire at the
   NRA

   (See figure in printed
   edition.)

Source:  Life Tables for the United States Social Security Area
1900-2080, Actuarial Study No.  107, Office of the Chief Actuary,
Social Security Administration, U.S.  Department of Health and Human
Services. 

For many proposals, raising the retirement age is only a part of a
more comprehensive package of revisions to the Social Security
program.  Other provisions include such items as the establishment of
individual accounts (either mandatory or voluntary), increasing the
wage base of the Social Security payroll tax, modifying
cost-of-living adjustments made to Social Security benefits,
expanding program coverage to newly hired state and local government
employees, eliminating the so-called earnings test, and revising the
benefit computation formula.\7

--------------------
\6 In 1937, Social Security provided one-time payments to
beneficiaries.  Regular monthly payments were initiated in 1940. 

\7 For example, see H.R.  2768, H.R.  3082, H.R.  4256, S.  1792, and
S.  2313, introduced in the 105\th Congress.  The earnings test
refers to the amount of income Social Security recipients can earn
without having their benefits reduced.  Currently, retirees younger
than 65 can earn $9,600 a year, with benefits reduced by $1 for every
$2 earned above that amount.  For retirees aged 65 to 69, the ceiling
is $15,500 per year, with every $3 earned above that amount reducing
benefits by $1.  There is no ceiling for retirees aged 70 and above. 

   RAISING RETIREMENT AGES WOULD
   IMPROVE TRUST FUND SOLVENCY BUT
   INCREASE DISABILITY CASELOADS
------------------------------------------------------------ Letter :3

Increasing the Social Security retirement ages could have substantial
positive effects on the financial integrity of the Social Security
program.  OASI Trust Fund solvency would improve as employees
remained in the labor market longer, contributing more to payroll tax
revenue and receiving Social Security benefits for a shorter time. 
In addition, the economy might grow because workers would be likely
to extend their careers.  These positive effects would vary,
depending on how high and how fast the ages were raised, particularly
with the NRA, and how the retirement behavior of workers responded to
the change.  Raising the retirement ages could result in increased
caseloads for DI and SSI.  However, for all the options we assessed,
the increased costs from a higher DI caseload would not offset the
significant cost savings that would accrue to the OASI portion of the
Social Security Trust Funds.\8 Because SSI is financed by general
revenues, any increase in SSI caseloads would affect federal general
funds but would not affect the solvency of the Social Security Trust
Funds. 

--------------------
\8 The options we chose to assess are meant to illustrate a wide
range of retirement age changes and their effect on solvency. 

   CHANGES TO RETIREMENT AGES
   COULD POSITIVELY AFFECT TRUST
   FUND SOLVENCY
------------------------------------------------------------ Letter :4

Our analysis of different options for raising retirement ages
illustrates their potentially substantial effects on the solvency of
the trust funds and the financial integrity of the Social Security
program.  The amount of the funding shortfall that could be erased by
retirement age increases depends on the size and the speed of the
changes, particularly with the NRA.  The size of a change would
affect the amount of lifetime benefits paid to retirees.  If workers
responded to the increase in retirement ages by working more years,
they would receive benefits for a shorter period of time.  If workers
did not choose to work additional years, they would receive smaller
monthly benefits.  The speed of a change could have a large effect on
solvency if it were made in time to affect the benefits that are paid
to the baby-boom generation.\9

Figure 2 displays the effects of different retirement age changes
that have been discussed by policymakers and others seeking to
restore solvency to the trust funds.  Currently, the OASDI Trust
Funds have a payroll tax shortfall of 2.07 percent over the next 75
years--OASI accounts for 1.70 percent of the shortfall and DI 0.36
percent.\10 The payroll tax shortfall refers to the immediate
increase in Social Security payroll taxes, expressed as a percentage
of taxable wages that would be necessary to make the trust funds
solvent.  The first three options for retirement age changes depicted
in figure 2 demonstrate how relatively large increases in retirement
age could reduce a substantial amount of the Social Security Trust
Funds financial shortfall.  Option 1 shows that raising the EEA to 67
and the NRA to 71 by 2063 would reduce the shortfall by nearly 70
percent.  Options 2 and 3 depict relatively similar changes to the
retirement ages but the time periods for making the changes are
different.  Option 2 would phase in the changes more slowly, option 3
more quickly, than option 1.  Thus, option 2 would have a smaller
effect on solvency than option 1 whereas option 3 would have a larger
effect. 

   Figure 2:  The Effect of
   Raising the Retirement Ages on
   the Solvency of the Social
   Security Trust Funds

   (See figure in printed
   edition.)

Note:  The percentage change in trust fund solvency refers to changes
in the current 75-year trust funds balance (negative or positive)
expressed as a percentage of taxable payroll.  For example, if OASDI
solvency is improved by 69 percent, the payroll tax shortfall would
be 0.65 percent, since the current shortfall is 2.07 percent (the
amount taxes would have to be raised to erase the funding deficit). 
See appendix I for a description of the time periods in which the
retirement age changes were assumed to be made for each option. 

Options 4-6 show the effects of more modest changes to the retirement
age and the significance of changes in the NRA.  Option 4 shows that
increasing the NRA to 70 without a change in the EEA would reduce the
solvency problem by more than 50 percent.  Options 5 and 6 would also
raise the NRA to 70 but would phase in the change over a longer time
period, resulting in a smaller effect on solvency.  Option 6, which
is the same as option 5 but also raises the EEA to 65, would have
only a slightly greater effect on solvency.  This suggests that
increasing the EEA has only a small effect on trust fund solvency,
although its effect of encouraging people to work longer could be
beneficial for the economy as a whole in facilitating growth.\11

--------------------
\9 The effects of various retirement age options are also sensitive
to participant behavior--that is, how workers react to the policy
change.  See appendix I for a detailed description of the retirement
age changes and the associated behavioral assumptions we applied in
using the EBRI-SSASIM2 policy simulation model. 

\10 Board of Trustees, Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds, The 1999 Annual Report (Washington,
D.C.:  U.S.  Government Printing Office, 1999), p.  113. 

\11 Workers who retire at earlier ages receive lower monthly benefits
throughout their lifetimes.  SSA benefits are designed such that the
total lifetime value of benefits received by a person retiring at the
EEA is about equal, on average, to that received by a person who
retires at the NRA.  For those who retire before the NRA, the reduced
payroll tax receipts from the forgone years of work approximately
offset the lower monthly benefit level paid over the retirement
years. 

   RAISING RETIREMENT AGES COULD
   CREATE INCENTIVES LEADING TO
   INCREASED DI PARTICIPATION
------------------------------------------------------------ Letter :5

Raising the EEA or the NRA or both could provide incentives for
individuals in relatively poor health to apply for disability
benefits.  First, workers who remain in the labor force longer are
more likely to become disabled, so increasing retirement ages would
increase the number of disabled workers and the DI caseload.  An
additional incentive would arise because a higher retirement age
would increase the gap between retired worker benefits and disability
benefits that existed before the increase.\12 Workers who are awarded
DI benefits receive a benefit amount comparable to what they would
have received if they had retired at the NRA.  Thus, disabled workers
who are awarded DI benefits at age 62 currently receive a 25-percent
higher benefit than if they received retired worker benefits.  If the
NRA were increased to 67, the gap between retired worker and DI
benefits at age 62 would grow to 43 percent.  To the extent that the
NRA were raised further, the gap between DI and retired worker
benefits would also grow.  Raising the EEA would have an even greater
effect, because retired worker benefits would now be available only
at the new higher EEA.  This would greatly increase the incentive for
workers to apply for DI benefits once they reached the previous EEA. 

Medicare eligibility offers another incentive for individuals to
apply to the DI program.  DI participants are eligible for medical
coverage under Medicare 2 years after DI benefits commence.  Thus,
individuals awarded DI benefits before age 63 get extra Medicare
coverage for which they would not otherwise be eligible until age 65. 
If Medicare eligibility were raised along with the EEA and NRA,
individuals would thus have an incentive to try to attain DI
benefits.  Medicaid represents an additional medical coverage issue
in that individuals who are dually eligible for DI and SSI benefits
are also generally eligible to receive Medicaid, thus possibly
increasing costs to this program. 

Raising retirement ages would also change some of the administrative
disincentives that currently keep people from applying for DI
benefits at age 62.  Although DI applicants can earn retired worker
benefits while their application is being processed, DI participation
is likely discouraged at ages 62 to 64 because of the lengthy
disability determination process and restrictions on earnings.\13
Figure 3 illustrates this effect, showing a steady increase in the
rate of new disability awards from age 53 to age 61, which drops
substantially at age 62 and falls further through age 64.  This
decline could occur for a number of reasons.  There is a 5-month
waiting period after the onset of the disability until a person can
apply for benefits and the subsequent disability determination
process is complex and can prove lengthy.  In comparison, the
application process for Social Security retirement benefits is
straightforwardapplicants must only meet the coverage and age
requirements. 

   Figure 3:  New Disability
   Awards as a Percentage of the
   DI-Covered Population, Ages
   53-64

   (See figure in printed
   edition.)

Note:  Predicted values are based on the trend from ages 55 to 61. 

Source:  SSA, Annual Statistical Supplement (Washington, D.C.: 
1993-96), table 6.A4. 

For participants with wage earnings, DI benefits are also generally
subject to a more stringent earnings test; they are reduced to a
greater degree than are Social Security retirement benefits. 
Currently, retired beneficiaries who are younger than 65 may have
average monthly earnings up to $800 with no benefit reduction, after
which benefits are reduced by $1 for every $2 over that amount.  In
contrast, after a trial period, DI recipients have their full benefit
withheld if they earn more than the amount considered to be
substantial gainful activity (average monthly earnings of $700). 
Finally, DI benefits are offset by workers' compensation benefits,
while Social Security retirement benefits are not.  Thus, the
availability of retired worker benefits at age 62 currently creates
an incentive for many workers to apply for retired worker benefits
rather than DI benefits.  If the EEA were raised, these incentives
would change and more workers would apply for DI. 

Our analysis indicates that the increase in DI participation would
not offset a substantial amount of the cost savings that could accrue
to the OASI portion of the trust fund if retirement ages were raised
to levels comparable to those in figure 2.  For example, if option 3
(which raises the EEA to 67 and the NRA to 72 by 2030) were adopted,
the incentives mentioned above that encourage workers to apply for
Social Security retirement benefits instead of DI benefits would be
applicable at age 67 rather than age 62.  Figure 3 illustrates the
expected rate of increase in new DI participation if retired worker
benefits were no longer available at ages 62-67.\14 This trend line
assumes that the new increase in DI participation would be similar to
the rate of increase in participation at ages 53 to 61, when retired
worker benefits are currently not available.\15 If we assume this
rate of change in new DI participation, the DI Trust Fund would incur
an increasing payroll tax shortfall.  However, the improvement in
solvency for the OASI Trust Fund would offset the DI cost increases,
resulting in a net improvement in solvency for the OASDI Trust Funds. 

--------------------
\12 Once a person is placed on the DI rolls, benefits continue until
death, until SSA determines that he or she no longer meets the
eligibility requirements, or until benefits are converted to Social
Security retirement benefits at the NRA. 

\13 J.L.  Mashaw and V.  Reno (eds.), Balancing Security and
Opportunity:  The Challenge of Disability Income Policy (Washington,
D.C.:  National Academy of Social Insurance, Disability Policy Panel,
1996). 

\14 Figure 3 extends the trend line only to age 64.  For purposes of
the estimation, we continued the trend until age 67. 

\15 According to SSA officials, the rate of increase in DI
participation could be even higher than the estimates we present in
figure 3 because the likelihood of meeting disability requirements
increases with age. 

   RAISING RETIREMENT AGES WOULD
   SLIGHTLY INCREASE SSI
   PARTICIPATION
------------------------------------------------------------ Letter :6

The SSI program would also experience an increase in the number of
participants as a result of raising the retirement ages. 
Seventy-nine percent of SSI participants receive benefits because
they are disabled or blind and have income and other resources below
specified thresholds.  The remaining 21 percent are qualified
participants by being 65 years old or older with income and other
resources below the specified thresholds.  As with DI, the number of
disabled SSI recipients would likely increase with a higher OASI
retirement age because more individuals are likely to become disabled
as the number of working years increases.  The increase in
participation would depend on the extent to which these disabled
individuals have income and other resource levels that qualify them
for SSI.  On the basis of our estimations of increased participation
in the DI program, we expect a small increase in SSI participation
from disabled individuals if retirement ages are raised.  In
addition, according to SSA, if the NRA is raised but the EEA is not,
the reduction in benefits at the early eligibility ages may cause
some individuals' benefits to be sufficiently low as to make them
eligible for SSI.  Because SSI is financed through general revenues,
increases in program participation would affect the overall federal
budget rather than the Social Security Trust Funds.  Moreover,
individuals who receive SSI benefits are generally eligible for
Medicaid benefits.\16 Thus, raising retirement ages might also
indirectly affect the Medicaid program. 

In contrast to the increase in the number of disabled SSI
participants, the number of older SSI participants might actually
decrease if the EEA were changed.  This is because SSI currently
creates an incentive for low-income, nondisabled individuals to
retire at the EEA.  Raising the EEA could induce prospective SSI
recipients to stay in the labor force, likely reducing their
eligibility for SSI. 

SSI's incentive for low-income, nondisabled individuals to retire at
the EEA is that such retirement maximizes their lifetime benefits
from Social Security and SSI.\17 Individuals who elect to receive
Social Security benefits at age 62 and subsequently qualify for SSI
at age 65 earn more total benefits than if they first receive Social
Security benefits at age 65.  For individuals aged 65 or older with
incomes below the SSI threshold, benefit payments are raised to the
SSI threshold even if they began receiving Social Security benefits
before age 65.  For example, an individual who was entitled to a
Social Security benefit of $400 at age 62 in 1993 could have received
this benefit from age 62 to age 64 and then applied to the SSI
program at age 65.  His or her monthly benefit would then be $470 at
age 65 ($400 from Social Security and an additional $70 from SSI). 
If the EEA were raised, this could induce prospective SSI
participants who can work to remain in the labor force, which would
increase the amount of their Social Security benefit and their
accumulation of assets.  Both of these factors would reduce their
ability to qualify for SSI and reduce the number of older SSI
beneficiaries.  Thus, an increase in the EEA may decrease the number
of older SSI participants.\18

--------------------
\16 Medicaid is a joint federal and state entitlement program
providing medical assistance for low-income children and pregnant
women, members of families with dependent children, and low-income
persons who are aged, blind, or disabled. 

\17 D.  Neumark and E.  Powers, Welfare for the Elderly:  The Effects
of SSI on Pre-retirement Labor Supply, working paper 6805 (Cambridge,
Mass.:  National Bureau of Economic Research, 1998). 

\18 If the NRA but not the EEA were raised, then the incentive to
take retired worker benefits at the earliest possible age would not
change.  Under this scenario, raising the NRA would be likely to have
little effect on the number of older SSI participants. 

   RAISING RETIREMENT AGES WOULD
   INCREASE THE NUMBER OF OLDER
   WORKERS IN THE LABOR MARKET
------------------------------------------------------------ Letter :7

Raising the retirement ages would increase the number of older
workers in the labor market, particularly as the baby-boom generation
ages.  The magnitude of this increase would depend on whether the
EEA, the NRA, or both were raised, the size of the increase, and the
transition period allowed for the change to be implemented.  Although
the health of the older population has improved, older workers may
face significant barriers to continued employment.  Employers' needs
for particular skills and their perceptions about older workers'
productivity may form potential barriers to older workers retaining
their current jobs, finding new jobs if they are laid off, or
reentering the labor force after retirement.  However, many older
workers are currently leaving a career job and then finding similar
full- or part-time work. 

      SOCIAL SECURITY IS ONE
      FACTOR AMONG MANY AFFECTING
      THE RETIREMENT DECISION
---------------------------------------------------------- Letter :7.1

From 1950 to 1985, there was a downward trend in labor force
participation among men aged 55 and older.\19 (See figure 4.)
However, labor force participation among older men has been
relatively constant since 1985, varying between 66 and 68 percent of
all men 55 to 64 years old and between 16 and 17 percent of all men
65 and older.  Labor force participation rates for older men are
projected to increase slightly over the next decade.\20

   Figure 4:  Labor Force
   Participation Rates of Men Aged
   55 and Older, 1950-98

   (See figure in printed
   edition.)

Source:  Current Population Survey, Bureau of Labor Statistics. 

The specified eligibility ages for benefits under Social Security
provide an important benchmark for considering when to retire;
however, many other aspects of the Social Security program also
influence the retirement decision, such as the level of Social
Security benefits.  Social Security benefits, adjusted for inflation,
increased substantially during the 1970s and this tended to encourage
early retirement, although benefit increases leveled off during the
1980s and 1990s.\21 Other changes in the program have encouraged
continued employment.  For example, the amount of income Social
Security recipients can earn without having their Social Security
benefits reduced (the earnings test) has been increased in recent
years.  Recently enacted legislative changes raising the delayed
retirement credit, which boosts Social Security benefits for working
beyond the NRA, will further increase the attractiveness of
employment at later ages.\22

Other factors besides the Social Security program affect workers'
decision to retire, and many of these tend to encourage employment in
later ages.  For example, between 1945 and 1985, up to half of all
workers were subject to mandatory retirement policies, usually at age
65, limiting the labor force participation of older workers. 
However, the Age Discrimination in Employment Act of 1986 (ADEA)
eliminated most forms of mandatory retirement.\23 Increasing levels
of income and wealth following World War II also meant that a greater
number of individuals could afford to retire at earlier ages. 
However, real wage growth for many employees has declined since the
late 1970s, picking up only during the past few years.  The shift
from defined-benefit to defined-contribution pension plans has also
provided incentives for employees to work to later ages.\24 In the
past, a greater percentage of pension plan participants were covered
by employer-sponsored defined-benefit pensions, which could encourage
early retirement because they often provide relatively little
additional retirement benefit after the worker reaches the plan's
target retirement age, usually specified in terms of years of service
with that employer.  However, over the past 2 decades, an increasing
percentage of workers have been covered by defined contribution
plans.  These plans, because they are dependent on workers' and
employers' contributions, do not create incentives for retiring
early.\25

--------------------
\19 Much of the literature concerning long-term trends in labor force
participation has focused on men.  It is often assumed that past
employment patterns of men should reflect the future employment
patterns of women, as more women enter the labor force at earlier
ages. 

\20 H.N.  Fullerton, Labor Force 2006:  Slowing Down and Changing
Composition, Monthly Labor Review, Nov.  1997, pp.  23-38. 

\21 See Richard A.  Ippolito, "Toward Explaining Early Retirement
After 1970, Industrial and Labor Relations Review, Vol.  43, No.  5
(July 1990), pp.  556-69.  This study attributed a 20-percent decline
in labor force participation among men aged 55 to 64 years old from
1970 to 1986 primarily to a 50-percent increase in Social Security
benefits in the 1970s and to changes in employer-sponsored pension
plans that favored early retirement. 

\22 Under current law, workers who delay retirement until after the
NRA receive delayed retirement credits (DRC).  Such credits increase
benefits by additional amounts for every year up to a maximum.  The
Congress has increased the DRC since the early 1980s.  The DRC was 1
percent per year for workers who attained age 65 before 1982 and 3
percent per year for workers who attained age 65 between 1982 and
1989.  Starting in 1990, the DRC began increasing by one-half of 1
percent every other year until it reaches 8 percent for workers
reaching age 65 after 2007. 

\23 This federal law protects older workers, those aged 40 or more,
from employment discrimination.  However, some forms of mandatory
retirement are still permissible under federal law.  For example, a
state or political subdivision may institute a mandatory retirement
program pursuant to a bona fide retirement plan in effect before
March 3, 1983.  Tenured faculty members may be subject to compulsory
retirement at age 70.  Finally, bona fide executives or high policy
makers who are age 65, have been in such positions for 2 years, and
are entitled to an immediate nonforfeitable annual retirement benefit
of at least $44,000 may be subject to compulsory retirement. 

\24 A defined benefit pension plan promises the worker a benefit
based on a specific formula linked to the worker's earnings and years
of employment.  In a defined contribution plan, a percentage of the
worker's pay is contributed to an account from which the worker
receives a benefit upon retirement. 

\25 See J.  Quinn, "New Paths to Retirement," in O.  Mitchell, B. 
Hammond, and A.  Rapport (eds.), Forecasting Retirement Needs and
Retirement Wealth (Philadelphia:  University of Philadelphia Press
(forthcoming)) for a complete discussion of the factors influencing
retirement. 

      INCREASING THE EEA CAN HAVE
      A MAJOR EFFECT ON OLDER
      WORKERS' LABOR FORCE
      PARTICIPATION
---------------------------------------------------------- Letter :7.2

The EEA of 62 encourages early retirement.  The availability of
Social Security benefits allows workers to substitute nonlabor income
for earnings, which induces many older workers to retire.  Social
Security replaces about 40 percent of an individual's preretirement
income, on average, if benefits are taken at the EEA of 62.\26 Thus,
individuals who work beyond age 62 pass up the opportunity to obtain
a substantial portion of their salary without working.  Although
individuals who work beyond 62 gain increased benefits, they must
continue to pay Social Security taxes with the possibility that they
will not fully collect these additional benefits.  According to one
study on the effects of these factors on the retirement decision, the
lifetime benefits from Social Security are roughly equivalent whether
benefits start at age 62, 63, or 64.\27 Thus, individuals who work a
few years beyond the EEA are fairly compensated, in terms of Social
Security benefits, for staying in the labor force.\28 However, a
person who works beyond 64 is not currently fully compensated for the
extra years in the labor force because the benefit increases beyond
the NRA do not offset benefits forgone and extra taxes paid.\29

Raising the EEA is likely to substantially affect older workers'
retirement decisions.  Although the lifetime benefits that a retiree
earns from Social Security are nearly equivalent whenever benefit
payments are started from age 62 through age 64, the EEA is the
preferred age for initially receiving Social Security benefits.  As
table 1 shows, 60 percent of new retirees begin to receive benefits
at age 62.  This preference for retirement at age 62 can be partially
explained by the many older workers who cannot afford to stop working
until they can receive Social Security benefits.  Also, many older
workers leave a career job and work part-time before age 62 in jobs
that provide enough income to finance their retirement until they are
eligible to receive Social Security benefits.  If the EEA were
raised, these workers might be inclined to stay in the labor force
until they attained the new EEA.  Thus, raising the EEA could keep
workers in the labor force longer. 

                                Table 1
                
                 Percentage of Individuals Electing to
                Start Receiving Social Security Benefits
                   at Age 62 and Later, 1940 to 1996

                                          Ages            Ages  Averag
Year                            Age 62   63-64  Age 65     66+   e age
------------------------------  ------  ------  ------  ------  ------
1940                                \a      \a    8.3%   91.7%    68.7
1950                                \a      \a    23.1    76.9    68.5
1960                             10.0%    7.9%    35.3    46.7    66.2
1970                              27.8    23.2    36.9    12.1    64.2
1980                              40.5    22.2    30.7     6.6    63.7
1990                              56.6    20.2    16.6     6.7    63.6
1996                              60.2    17.8    16.2     5.8    63.5
----------------------------------------------------------------------
\a Benefits not available before age 65. 

Source:  Staff, Committee on Ways and Means, U.S.  House of
Representatives, 1998 Green Book (Washington, D.C.:  U.S.  Government
Printing Office, 1998). 

A change in the EEA, particularly if it were implemented quickly,
could affect a substantial number of older workers.  In 1996, there
were nearly 21 million persons (11 percent of the labor force) in the
United States aged 55 to 64 and 42 percent of them did not
participate in the labor force.  Over the next decade, the number of
persons aged 55 to 64 is projected to grow to 30 million (14 percent
of the labor force), and 37 percent are not expected to be in the
labor force.\30 Raising the EEA could induce many of these persons to
change their retirement plans. 

--------------------
\26 P.  Diamond and J.  Gruber, Social Security and Retirement in
the United States, Social Security and Retirement around the World
(Chicago:  University of Chicago Press, 1999). 

\27 Diamond and Gruber, Social Security and Retirement in the United
States.

\28 The approximate equivalency in lifetime benefits at the earliest
eligibility ages is referred to as actuarial fairness. This
actuarial fairness means that substantial cost savings to the OASDI
Trust Funds will likely not occur if the earliest eligibility age is
raised, because the total payment of benefits will continue to be
roughly the same in the absence of a change in the NRA.  The lower
benefits when retiring at the EEA are counterbalanced by the forgone
payroll taxes that would have been paid if the worker retired at a
later date.  For example, we estimated a change in the EEA to age 64
with the currently mandated change in the NRA to age 67.  The change
in the EEA actually worsened the solvency of the trust funds (the
change in solvency was less than 1 percent) because the small cost
savings that accrued to OASI from raising the EEA were more than
offset by increased costs to DI. 

\29 As noted earlier, the delayed retirement credit is steadily being
increased until it reaches 8 percent in 2007.  This will increase the
level of benefit payments for persons choosing to retire after the
NRA and bring benefit payments closer to actuarial fairness. 

\30 Fullerton, Labor Force 2006.

      THE EFFECTS OF INCREASING
      THE NRA WILL DEPEND ON ITS
      RELATIONSHIP TO THE EEA
---------------------------------------------------------- Letter :7.3

Raising the NRA could also affect an individual's decision to
continue working, depending on how high it is raised in relation to
the EEA.  If the NRA rises without increasing the EEA, as was
legislated in 1983, then benefit levels at all ages between the EEA
and the NRA will be reduced.  (See table 2.) In other words, as the
gap between the EEA and the NRA grows, individuals will earn lower
benefit rates at pre-NRA ages.  However, if the structure of benefits
is maintained such that lifetime benefits are the same at all EEAs
and the NRA, as now, then incentives might not be created to keep
workers in the labor force beyond the EEA.  The extent to which a
rise in the NRA will affect decisions to work to older ages will
depend on the degree to which individuals need to obtain additional
income from other sources to offset the cut in benefit rates.  On one
hand, individuals can expect the same lifetime benefit if they retire
before the NRA; therefore, they might be likely to continue to retire
at the EEA.  On the other hand, the lower benefit rates at pre-NRA
ages might induce many individuals to continue to work in order to
earn a higher monthly benefit. 

                                Table 2
                
                  The Percentage Reduction in Benefits
                 Upon Retirement Before the Current NRA
                Compared With the Reduction When the NRA
                   Rises to 67 According to the 1983
                              Legislation

reduct
   ion
   for
 early
retire                                                    NRA =   NRA =
  ment  retirement                                           65      67
------  -----------------------------------------------  ------  ------
62                                                        20.0    30.0
63                                                        13.3    25.0
64                                                         6.7    20.0
65                                                          \a    13.3
66                                                          \a     6.7
----------------------------------------------------------------------
\a Not applicable. 

Source:  Staff, Committee on Ways and Means, U.S.  House of
Representatives, 1998 Green Book (Washington, D.C.:  U.S.  Government
Printing Office, 1998). 

      IMPROVED HEALTH AMONG OLDER
      WORKERS INCREASES THEIR
      ABILITY TO WORK TO LATER
      AGES
---------------------------------------------------------- Letter :7.4

Raising the retirement ages would be consistent with the findings of
recent studies about the health of the elderly population that show
that people have the ability to continue working as they age.  One
study estimated that from 1982 to 1994 the disability rates among
persons aged 65 to 69 fell from 11.7 percent to 9.7 percent.\31 This
study found a similar trend toward improved health among persons 70
years old and older.  Another study estimated that the expected
number of disability-free years after age 65 rose during the 1980s in
the United States for men from 6.8 to 7.4 and for women from 9.3 to
9.8.\32 This research suggests that improvements in life expectancy
have been accompanied by improvements in work life expectancy. 

In addition to the findings about improved health at older ages, it
appears that poor health is not the primary reason why many people
retire early.  Some evidence suggests that raising the EEA would have
only a limited effect on individuals in poor health.\33 For example,
one study found that the majority of persons who retire at the EEA do
so because they are financially able and not because of poor health. 
Thus, if the EEA were increased, the primary effect would be to deny
benefits to individuals who retired early for financial reasons
rather than to deny benefits to individuals who retired early because
of poor health.\34

--------------------
\31 K.G.  Manton, L.S.  Corder, and E.  Stallard, Chronic Disability
Trends in Elderly United States Populations:  1982-1994, Proceedings
of the National Academy of Sciences of the United States of America,
Vol.  9 (March 1997), pp.  2593-98. 

\32 E.M.  Crimmins, Y.  Saito, and D.  Ingegneri, Trends in
Disability-Free Life Expectancy in the United States, 1970-1990,
Population and Development Review, Vol.  23, No.  3 (1997), pp. 
555-72. 

\33 R.V.  Burkhauser, K.A.  Couch, and J.W.  Philips, Who Takes
Early Social Security Benefits?  The Economic and Health
Characteristic of Early Beneficiaries, The Gerontologist, Vol.  36,
No.  6 (1996), pp.  789-99.  A 1999 study by the Congressional Budget
Office, Raising the Earliest Eligibility Age for Social Security
Benefits (Washington, D.C.:  Jan.  1999), came to a similar
conclusion. 

\34 The Burkhauser, Couch, and Philips study is the culmination of a
shift in conclusions about retirement from health toward financial
determinants.  In 1990, J.  Quinn, R.  Burkhauser, and D.  Myers
documented this shift in thinking that began in the middle 1960s in
Passing the Torch:  The Influence of Economic Incentives on Work and
Retirement (Kalamazoo, Mich.:  W.E.  Upjohn Institute for Employment
Research, 1990).  Before this time, health was thought to be the
primary consideration for an individual's decision to retire. 
However, research in the 1970s and 1980s began to highlight the role
of employer-provided benefits, household wealth, and Social Security
benefits in individual retirement decisions. 

      OLDER WORKERS FACE BARRIERS
      TO CONTINUED EMPLOYMENT
---------------------------------------------------------- Letter :7.5

Although the improved health of the elderly population suggests the
potential for increased employment by older workers, those workers
must still seek and secure employment in the labor market.  Employers
may not want to hire or retain older workers for several reasons. 
Recent research suggests that employers who provide health care
coverage are less likely to hire older workers.\35 The researchers
who found this negative correlation indicate that it is probably the
result of a provision in the ADEA that firms must offer workers who
have similar experience the same level of benefits.\36 Since younger
employees are less costly to insure, firms prefer them.  The shorter
potential length of time an older worker may remain with an employer
is another obstacle to hiring older workers, because some employers
are less likely to recoup recruitment and training costs for them
than for younger workers.\37 Recruitment involves such activities as
job advertising and conducting applicant interviews.  Newly hired
employees may also require significant training to perform their
jobs.  If turnover rates between younger and older workers do not
differ, younger workers provide employers a longer period to recoup
these costs than older workers do. 

A final obstacle that older workers face is a negative perception
among employers about their productivity.\38 Surveys have found that
managers have both positive perceptions about the productivity of
older workers--for example, that they have superior judgment and
commitment to quality, have better work habits, and are very
reliable--and negative perceptions--for example, that they have
reduced ability to learn new skills or technologies and lower
physical vigor.  However, these studies conclude that most managers
believe that the so-called negative aspects of older workers outweigh
the positive aspects, suggesting that they may be less likely to
hire, or retain, older workers when given the opportunity. 

--------------------
\35 F.A.  Scott, M.C.  Berger, and J.E.  Garen, Do Health Insurance
and Pension Costs Reduce the Job Opportunities of Older Workers?
Industrial and Labor Relations Review, Vol.  48, No.  4 (1995), pp. 
775-91. 

\36 The ADEA makes it unlawful for an employer to discriminate
against individuals with respect to their compensation, terms,
conditions, or privileges of employment because of their age. 
However, the act applies only to firms with 20 or more employees,
excluding a not insignificant proportion of the labor force. 
Although the states have their own laws protecting older workers at
small firms, some do not provide additional coverage of such small
businesses.  For example, Alabama and Louisiana cover only businesses
with 20 or more employees, and Nebraska covers only employers with 25
or more employees.  Other states, like California and Illinois, still
fail to cover all small employers, exempting those with fewer than
five employees. 

\37 R.M.  Hutchens, Do Job Opportunities Decline with Age?
Industrial and Labor Relations Review, Vol.  42, No.  1 (1988), pp. 
89-99. 

\38 M.C.  Barth, Older Workers:  Perception and Reality, paper
delivered by the Executive Vice President, ICF Kaiser Consulting
Group, at the U.S.  Senate Special Committee on Aging Forum, n.p.,
July 25, 1997. 

      QUESTIONS REMAIN ABOUT THE
      ACCESS AND ADEQUACY OF
      TRANSITIONAL EMPLOYMENT FOR
      OLDER WORKERS
---------------------------------------------------------- Letter :7.6

A major issue facing many older workers is the availability and the
income adequacy of so-called bridge jobs--the transitional employment
from a career job until complete retirement.  Increasingly, workers
who retire from career jobs are continuing to work.\39 In addition,
many companies that are downsizing their workforces offer early
retirement incentives.\40 Older workers who act on an early
retirement incentive may underestimate their need for financial
resources during retirement and may need to reenter the labor force
to earn additional income to meet their retirement needs.  If Social
Security retirement ages are raised and employers continue to offer
early retirement incentives, then these bridge jobs are likely to
become more important.  Individuals will have longer time periods to
fill between leaving a career job and qualifying for Social Security
benefits. 

In 1996, nearly half of all workers aged 55 to 65 who had left their
career job were employed in a bridge job.\41 The baby boom generation
appears to be ready to seek more employment in bridge jobs. 
According to a survey of persons born from 1946 through 1964, 80
percent expect to work during their retirement years.\42 Most older
workers move into bridge jobs that are similar to their career jobs. 
(See figure 5.) For example, 79 percent of workers who had a highly
skilled white-collar job during their careers were able to find a
highly skilled white-collar bridge job.  However, there is a shift in
employment toward lower-skilled blue-collar occupations and part-time
work as workers leave their career jobs and move into bridge jobs. 
Twenty-one percent of bridge jobs were in a lower-skilled blue-collar
occupation compared with 13 percent of career jobs.  Because of the
increased percentage of lower-skilled labor and part-time work,
bridge jobs tend to pay less than career jobs.  According to one
study, 65 percent of career jobs pay more than $10 per hour but only
39 percent of bridge jobs pay this much.\43 Employment in bridge jobs
is likely to shift further toward the lower-skilled service sector. 
The Bureau of Labor Statistics projects that employment in
service-producing industries will grow at more than twice the rate of
all other nonfarm industries over the next decade.\44

   Figure 5:  Comparison of Career
   Job Employment With Bridge Job
   Employment by Job Type and
   Skill Level

   (See figure in printed
   edition.)

Source:  J.  Quinn, New Paths to Retirement, in O.  Mitchell, B. 
Hammond, and A.  Rapport (eds.), Forecasting Retirement Needs and
Retirement Wealth (Philadelphia:  University of Philadelphia Press,
forthcoming). 

Another issue concerning the expansion of bridge job employment is
the matching of available employment with the physical conditions or
needs of older workers.  While the number of service-sector jobs
(cleaning, protection, food preparation, health, and personal
services) is expected to increase, these jobs may not be suitable for
retirees.  According to our analysis of the HRS, many service jobs
require older workers to exert themselves physically or to lift heavy
loads.  Sixty-two percent of workers aged 53 to 63 in the service
sector reported that their jobs required a lot of physical exertion
all or most of the time.\45 Twenty-seven percent of these workers
said that their jobs required them to lift heavy loads all or most of
the time.  Thus, many bridge jobs may not be suitable for individuals
who are in poor health. 

Another question about the growth of employment in bridge jobs
concerns the effective balancing of employers' and workers'
scheduling needs and flexibility.  Employees may prefer to work fewer
hours with their current employers rather than take bridge jobs. 
According to our analysis of the HRS, more than half of employees
aged 53 to 63 want to reduce the hours they work on their current
jobs as they get older while keeping their hourly pay the same. 
Thus, many older workers would prefer a more flexible schedule even
if it reduced their total compensation.  Some employers accommodate
older workers by offering them less demanding jobs.  Thirty percent
of older employees said their employers would let older workers move
to a less-demanding job with less pay.\46

--------------------
\39 D.E.  Herz, Work After Retirement:  An Increasing Trend Among
Men, Monthly Labor Review, April 1995, pp.  13-20, and Quinn, New
Paths to Retirement.

\40 M.L.  Marks, Restructuring and Downsizing, in Building the
Competitive Workforce:  Investing in Human Capital for Corporate
Success (New York:  John Wiley & Sons, 1993), pp.  60-94. 

\41 Approximately 46 percent of workers in this age group were still
employed in their career job according to Quinn, New Paths to
Retirement.

\42 This finding is based on an American Association of Retired
Persons survey of 2,001 members of the baby boom generation.  The
survey was conducted by Roper Starch Worldwide.  According to the
survey, 35 percent of respondents expect to work part-time, mainly
for the interest and enjoyment work provides, 23 percent expect to
work part-time for income, 17 percent expect to start their own
business, and 5 percent expect to retire from their current jobs and
work full-time doing something else. 

\43 Quinn, "New Paths to Retirement."

\44 J.C.  Franklin, Industry Ouput and Employment Projections to
2006, Monthly Labor Review, Nov.  1997, pp.  39-57. 

\45 Excluding workers who are fully or partially retired and
self-employed. 

\46 This statistic comes from an HRS question that asked respondents,
Would your employer let older workers move to a less demanding job?
The question did not define whether less demanding meant less
responsibility or less physically demanding duties. 

      RAISING RETIREMENT AGES
      COULD HURT SOME GROUPS OF
      WORKERS
---------------------------------------------------------- Letter :7.7

Although the long-term health prospects of older workers have
improved, the main factor that impedes individuals from working to
later ages remains poor health.  Furthermore, poor health remains
concentrated among certain groups of workers, particularly
blue-collar workers, who constitute 41 percent of workers aged 53 to
63.  Physically demanding blue-collar work tends to lead to health
problems that inhibit work at older ages.  According to our analysis
of the HRS, more than twice as many blue-collar workers as
white-collar workers reported that poor health was an important
factor in their decision to retire.  Moreover, because racial
minorities make up a disproportionate share of blue-collar workers,
they are more likely to be adversely affected by retirement age
increases.  Many individuals who have poor health but are not able to
qualify for DI benefits may have difficulty affording retirement. 
Their poor health makes them less employable than healthy workers
and, thus, their wages tend to be lower and their unemployment rates
higher.  Such individuals may find themselves both unable to afford
to retire and unable to find or retain appropriate work should Social
Security retirement ages rise. 

      BLUE-COLLAR WORKERS HAVE
      MORE HEALTH PROBLEMS AT
      OLDER AGES THAN WHITE-COLLAR
      WORKERS
---------------------------------------------------------- Letter :7.8

Our analysis of HRS data suggests that older blue-collar workers are
likely to have more difficulties in extending their careers than
older white-collar workers if retirement ages are raised.\47 Because
of the nature of their jobs or their socioeconomic status, many older
blue-collar workers experience health problems that may both inhibit
their ability to continue working to later ages and make them less
employable.  Older blue-collar workers are at greater risk for having
several health problems than older white-collar workers.  (See table
3.) After the effects of employment status, age, race, gender,
alcohol consumption, and smoking are controlled for, blue-collar
workers are more likely to have musculoskeletal problems, respiratory
diseases, diabetes, and emotional disorders than white-collar
workers.  Blue-collar workers are 58 percent more likely to have
arthritis, 42 percent more likely to have chronic lung disease, and
30 percent more likely to have a foot or leg problem.  In addition,
these workers are 33 percent more likely to have asthma, 21 percent
more likely to have diabetes, and 25 percent more likely to have
emotional disorders.\48 White-collar workers are not at greater risk
for any of the health problems examined in table 3.  White-collar
workers do have higher rates of cancer, but the difference is not
statistically significant. 

                          Table 3
          
           Health Outcomes of Blue-Collar Workers
          Compared With White-Collar Workers Aged
                           53-63

                                         Frequency
                                  ------------------------
                     Likelihood:       Blue-        White-
Outcome              blue-collar      collar        collar
----------------  --------------  ----------  ------------
Arthritis              1.583****       45.1%         37.8%
Asthma                    1.328*         4.8           4.3
Back problem               1.108        27.3          25.4
Cancer (other              1.096         5.1           6.4
 than skin)
Chronic lung            1.423***         9.0           6.6
 disease
Diabetes                  1.207*        12.2           8.8
Emotional                1.245**        10.3           8.8
 problem
Foot or leg            1.302****        28.3          24.2
 problem
Heart problem              0.932        13.4          13.2
Hypertension               1.048        42.9          39.2
Kidney or                  1.140         7.2           6.2
 bladder problem
Stomach or                 1.254         6.5           4.9
 intestine ulcer
Stroke                     0.926         2.2           1.9
----------------------------------------------------------
Note:  Number of observations = 6,589.  Independent variables =
blue-collar occupation, completely retired, partially retired, age,
gender, race, smoking behavior, alcohol consumption, and alcoholic
tendencies. 

****Statistically significant at the .0001 percent level. 

***Statistically significant at the .001 percent level. 

**Statistically significant at the .01 percent level. 

*Statistically significant at the .05 percent level. 

Source:  Wave 2 of the HRS, 1994. 

When all blue-collar occupations are grouped together, blue-collar
workers are 80 percent more likely than white-collar workers to
experience pain that affects their ability to perform their jobs. 
(See table 4.) The blue-collar occupations with risk factors for pain
affecting performance are personal services; farming, fishing, and
forestry; mechanics and repair; construction and mining; precision
production; machine operators; transportation operators; and material
handlers.  Moreover, twice as many blue-collar workers (27 percent)
as white-collar workers (13 percent) reported that poor health is a
very important factor in their decision to retire.\49

                          Table 4
          
          Pain Affecting Ability to Do Normal Work
             Among Blue-Collar and White-Collar
                     Workers Aged 53-63

                                  Odds ratio     Frequency
                                    for pain       of pain
------------------------------  ------------  ------------
All blue-collar occupations        1.813****         12.9%
All white-collar occupations              \a           8.4

Specific blue-collar occupations
----------------------------------------------------------
Cleaning services                      1.145          11.1
Construction and mining            2.428****          13.7
Farm, fish, forestry                  1.710*          10.7
Food preparation services              1.494          13.5
Health services                        1.565          14.8
Machine operators                  2.074****          15.1
Material handlers                    2.050**          13.2
Mechanics and repair                2.061***          11.9
Personal services                    1.632**          13.4
Precision production                  1.588*          10.4
Protection services                    1.649          10.8
Transportation operators           2.057****          12.5
----------------------------------------------------------
Note:  Number of observations = 6,582.  Independent variables =
blue-collar occupation, completely retired, partially retired, age,
gender, race. 

\a Not applicable. 

****Statistically significant at the .0001 percent level. 

***Statistically significant at the .001 percent level. 

**Statistically significant at the .01 percent level. 

*Statistically significant at the .05 percent level. 

Source:  Wave 2 of the HRS, 1994. 

The health problems of older blue-collar workers could diminish if
the labor market shifts toward less physically demanding work or if
technological improvements make blue-collar work less physically
demanding.  However, physically demanding jobs currently do not show
signs of diminishing.  SSA reported that in 1982 11.4 percent of
newly retired workers had jobs with heavy strength requirements.\50
In this study, SSA predicted that 8 to 10 percent of workers will be
in jobs with heavy strength requirements by 2000 and 7 to 9 percent
will be in such jobs by 2027.  However, our analysis of the HRS shows
that 15 percent of older workers reported that they had jobs that
required them to lift heavy loads all or most of the time in 1994, a
significantly larger estimate.  Thus, it appears that the proportion
of jobs that require older workers to perform physically demanding
work is still significant. 

--------------------
\47 For this analysis, we defined blue-collar workers as those
employed in the following occupational categories:  cleaning services
(1.0 percent of the labor force); protection services (1.8 percent);
health services (1.9 percent); material handlers (2.4 percent);
farming, fishing, and forestry (2.6 percent); food preparation
services (2.7 percent); construction and mining (3.8 percent);
mechanics and repair (3.8 percent); precision production (3.8
percent); transportation operators (4.9 percent); personal services
(5.0 percent); and machine operators (6.2 percent).  We defined
white-collar workers as those employed in the following occupations: 
sales (9.9 percent), clerical (16.2 percent), professional specialty
(16.4 percent), and managerial (17.4 percent).  These data are from
the HRS. 

\48 The logistic regression models were specified according to J.S. 
Petersen and C.  Zwerling, A Comparison of Health Outcomes Among
Older Construction and Blue-Collar Employees in the United States,
American Journal of Industrial Medicine, Vol.  34, No.  3 (Sept. 
1998), pp.  280-87. 

\49 This statistic refers to individuals who reported themselves as
completely retired. 

\50 SSA, "Increasing the Social Security Retirement Age:  Older
Workers in Physically Demanding Occupations or Ill Health," Social
Security Bulletin, Vol.  49, No.  10 (1986), pp.  5-23. 

      HEALTH PROBLEMS REDUCE
      INDIVIDUALS' FINANCIAL
      ABILITY TO RETIRE
---------------------------------------------------------- Letter :7.9

Older blue-collar workers with health problems have lower earnings
and are less employable.  Since blue-collar work is often physically
demanding, employers may foresee a risk of more workers' compensation
claims or health care costs from hiring older employees and thus may
be less likely to hire them.  This greater difficulty in obtaining
employment means some older workers will accumulate less wealth,
which makes it more difficult for them to afford to retire.  For
example, while it might be expected that persons who have health
problems would have significantly higher rates of retirement, 18
percent of blue-collar workers who have two or more health problems
are retired compared with 14 percent of those with no problems.  (See
table 5.) In addition, individuals who have more health problems are
in jobs that have lower rates of pension coverage.  Pension coverage
can give individuals the flexibility to be able to afford to retire
if they have poor health and cannot work to later Social Security
retirement ages. 

                                         Table 5
                         
                         Earnings, Retirement Rate, Unemployment
                           Rate, and Pension Coverage by Health
                          Status Among Blue-Collar Workers Aged
                                       53-63, 1994

               Percent with
Number of         number of  Percent of                          Unemployme  Percent with
health               health   all older      Median     Percent     nt rate       pension
problems\a         problems     workers    earnings     retired   (percent)      coverage
-----------  --------------  ----------  ----------  ----------  ----------  ------------
0                      36.8        14.7     $14,114        14.2         6.2          63.5
1                      32.4        13.0      11,616        15.8         7.7          59.6
2                      20.3         8.1       8,524        18.4         8.2          56.9
3 or more              10.5         4.2       3,278        19.8         9.4          53.3
-----------------------------------------------------------------------------------------
\a The number of health problems refers to the health problems that
blue-collar workers were at greater risk for developing compared with
white-collar workers. 

Source:  Wave 2 of the HRS, 1994. 

Our analysis also shows that older blue-collar workers with health
problems have higher unemployment rates than healthy blue-collar
workers.  (See table 5.) Blue-collar workers also have higher
unemployment rates than white-collar workers with similar health
status.  Corresponding to these higher unemployment rates, the
blue-collar workers with health problems have lower earnings.  For
example, the older blue-collar workers who have arthritis or chronic
lung disease have 38-percent and 27-percent lower median earnings,
respectively, than those who do not. 

      RAISING RETIREMENT AGES
      WOULD HAVE A
      DISPROPORTIONATELY ADVERSE
      EFFECT ON AFRICAN AMERICAN
      AND HISPANIC WORKERS
--------------------------------------------------------- Letter :7.10

Racial minorities are particularly likely to be adversely affected by
retirement age changes because they make up a disproportionate share
of blue-collar workers.  Table 6 shows that African Americans are 9.5
percent of older workers and 15.4 percent of older blue-collar
workers while the comparable percentages for Hispanics are 5.4 and
9.1.  Thus, the health problems that tend to arise among older
blue-collar workers would be disproportionately spread across these
populations.  Older African Americans and Hispanics are also more
likely to be unemployed than older white workers.  Although members
of each racial group are about as likely to report themselves as
retired, approximately 30 percent of older African Americans and
Hispanics report that poor health is a very important factor in their
decision to retire compared with 16.4 percent of older whites.  (See
table 7.)

                                Table 6
                
                 Employment Among Workers Aged 53-63 by
                               Race, 1994

                                        Africa
                                             n
                                        Americ  Hispan
                                 White      an      ic   Other   Total
------------------------------  ------  ------  ------  ------  ------
Population of all older          82.5%    9.5%    5.4%    2.6%    100%
 workers
Blue-collar workers               73.1    15.4     9.1     2.4     100
----------------------------------------------------------------------
Note:  Blue-collar workers constituted about 41.4 percent of all
workers aged 53-63. 

Source:  Wave 2 of the HRS, 1994. 

                                Table 7
                
                   Selected Employment Statistics for
                    Workers Aged 53-63 by Race, 1994

                                        Africa                     All
                                             n                  worker
                                        Americ  Hispan          s aged
                                 White      an      ic   Other   53-63
------------------------------  ------  ------  ------  ------  ------
Unemployment rate                 4.7%    9.1%   13.7%    8.8%    5.7%
Retired                          16.8%   18.5%   14.3%   10.6%   16.6%
Those who retired citing poor    16.4%   29.9%   28.6%   22.6%   18.3%
 health as a very important
 factor in their decision
----------------------------------------------------------------------
Source:  Wave 2 of the HRS, 1994. 

African American men and women will be further disproportionately
affected by an increase in retirement ages because they have lower
life expectancies than any other racial group.  Figure 6 shows that
African American males and females have the lowest life expectancy at
birth and at age 65.  In addition, the projected rate of growth in
life expectancy is slower for African Americans compared with most
other racial groups.\51

Therefore, if retirement ages were raised, African Americans would
experience the largest percentage decline in their expected lifetime
benefit compared with other racial groups because they will have
fewer years in which to collect benefits.  For example, African
American men and women at age 20 can expect 8.6 and 13.4 years of
retirement, respectively, if they retire at age 65.  In contrast, the
comparable projected numbers for whites at age 20 are 12.5 years for
men and 16.8 years for women.  The expected number of years of
retirement at age 20 with a retirement age of 70 is 5.8 years for
African American men, 8.8 years for white men, 9.7 years for African
American women, and 12.6 years for white women.  African American men
who retired at a new NRA of 70 would receive benefits for 33 percent
fewer years compared with 30 percent fewer for white men, and African
American women would receive benefits for 28 percent fewer years
compared with 25 percent fewer for white women. 

   Figure 6:  Life Expectancy at
   Birth and at Age 65 by Race,
   1998

   (See figure in printed
   edition.)

Source:  U.S.  Department of Commerce, Bureau of the Census,
Population Projections of the United States by Age, Sex, Race, and
Hispanic Origin:  1995 to 2050 (Washington, D.C.:  1999). 

--------------------
\51 For example, the rate of growth in men's life expectancy at age
65 over the next 50 years is 35 percent for whites and Hispanics,
15.9 percent for Asians, and 20.4 percent for African Americans. 

   CONCLUDING OBSERVATIONS
------------------------------------------------------------ Letter :8

Raising the retirement age can have many positive implications for
the Social Security program.  Depending on how high and how fast the
ages were raised, the solvency of the Social Security Trust Funds
could be significantly improved.  In addition, raising retirement
ages would create financial incentives for workers to extend their
careers.  To the extent that older workers who continued to work did
not displace younger workers, their lengthened work lives should
contribute to economic growth.  However, such proposals also pose
clear costs for some segments of the population, particularly workers
who are in poor health and older minority workers, groups that
already fare less favorably in the labor market. 

While it is useful to assess the effects of individual proposals,
such as increasing the retirement age, these proposals are often only
elements of larger, more comprehensive Social Security reform
packages.  Many of these broader initiatives contain a variety of
provisions for addressing the trust funds' solvency difficulties. 
These range from adjusting the programs' current tax and benefit
provisions to introducing features such as individual accounts that
could substantially alter the existing program structure.  In this
context, it is important to analyze the distributional consequences
of the individual components of each initiative, and their
interaction, to determine the cumulative effect on different segments
of the population.  Such an understanding is essential to keep
certain groups, particularly those who may already be at risk, from
bearing a disproportionate portion of the costs of reform.  Analyzing
the distributional effects of comprehensive Social Security reform
proposals can also assist in developing remedial provisions.  For
example, older minority workers could be helped by policies to direct
federal job training resources to facilitate their efforts to obtain
bridge jobs.  In any case, such analysis is necessary to ensure that
both the benefits and the burdens of reform are borne by all segments
of the population and not only by a few. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :9

We provided a draft of this report to SSA and the Employee Benefit
Research Institute.  In commenting on our report, the reviewers
generally agreed with our characterization of the factors that need
to be evaluated when considering an increase in the retirement ages. 
Their comments were primarily technical and clarifying in nature and
we made changes where appropriate. 

SSA expressed concern that limitations in the HRS because of the age
range of the group of respondents would preclude making conclusive
cause and effect statements about their possible reaction to an
increase in the retirement ages.  We were aware of the HRS
limitations and, as indicated in the report, our conclusions are
based on other academic and government studies.  SSA's written
comments are printed in appendix II. 

---------------------------------------------------------- Letter :9.1

We are sending copies of this report to the Commissioners of the
Social Security Administration and others who are interested.  We
will also make copies available to others on request.  If you or your
staff have any questions concerning this report, please call me on
(202) 512-5491.  The major contributors to this report are Charles A. 
Jeszeck, Assistant Director, (202) 512-7036; Jeffrey S.  Petersen,
Evaluator-in-Charge; and Barbara Smith, Senior Economist. 

Barbara D.  Bovbjerg, Associate Director
Education, Workforce, and Income Security Issues

DESCRIPTION OF THE SOCIAL SECURITY
SIMULATION MODEL
=========================================================== Appendix I

To assess how changes in the Social Security retirement ages affect
the solvency of the Social Security Trust Funds, we conducted a
variety of simulations using the EBRI-SSASIM2 model.  EBRI-SSASIM2
was originally developed under a series of contracts from the Social
Security Administration (SSA) as part of the 1994-96 Advisory Council
on Social Security's activities and has been enhanced subsequently
with support from the Employee Benefit Research Institute (EBRI) and
the American Association of Retired Persons (AARP).  The model can
simulate a variety of policy reforms to the Social Security program,
from incremental changes to the OASI and DI programs to broader
structural reforms that would introduce a defined contribution
(individual account) component to the Social Security system. 

The EBRI-SSASIM2 model simulates the dynamic interaction of the labor
force, the economy, and the Social Security programs and can be used
to generate aggregate program cost and income estimates as well as
estimates for the OASI and DI Trust Funds.  Changes in program
structure can be analyzed for any specified future time periods. 

For this report, we relied on the model for its capability in
analyzing the implications of revisions in the EEA, the NRA, or both
on the actuarially adjusted cumulative solvency of the trust funds
over a specified time period.  Consistent with SSA's annual
projections, we explored the effect of such changes on OASDI Trust
Fund solvency for the 75-year period 1999-2073.  The implications of
a reform relative to current-law policy are determined by comparing
the output results from a simulation that assumes the reform policy
with results from a simulation that assumes the current law. 

OPTIONS ILLUSTRATING THE EFFECTS
OF REVISING THE RETIREMENT AGES ON
TRUST FUND SOLVENCY

To illustrate the sensitivity of differential changes in the
magnitude and timing of the EEA and NRA on the solvency of the Social
Security Trust Funds, we used the EBRI-SSASIM2 model to estimate the
effect of six different options:\52

Option 1:  Increase in both the EEA and NRA.  After 2015, when EEA =
65 and NRA = 69, both the EEA and NRA are indexed to projected life
expectancy.  By 2063, EEA = 67 and NRA = 71. 

Option 2:  Slower increase in both the EEA and NRA than in option 1
until 2029.  Thereafter, increases occur more quickly.  EEA = 65 and
NRA = 70 in 2029.  By 2065, EEA = 67 and NRA = 72. 

Option 3:  Large and rapid increase in the EEA and NRA.  EEA = 66 and
NRA = 70 in 2015.  By 2030, EEA = 67 and NRA = 72. 

Option 4:  Rapid increase in the NRA with no increase in the EEA. 
NRA = 68 in 2017 and 70 in 2029. 

Option 5:  Slower increase in the NRA than option 4.  NRA = 68 in
2017 and 70 in 2065. 

Option 6:  Option 5 with an increase in the EEA.  EEA = 63 in 2017
and 65 in 2065. 

These options were constructed to reflect a range of possible changes
in the EEA and NRA.\53 Because of the large number of years over
which the projections are made, the estimates corresponding to these
options should not be interpreted as precise estimates of the effects
on trust fund solvency. 

ASSUMPTIONS USED IN THE
CONSTRUCTION OF THE SOLVENCY
SCENARIOS

In our analysis, we made a number of assumptions.  With respect to
population and economic projections, we used the intermediate
assumptions in The 1999 Annual Report of the Board of Trustees of the
Federal Old-Age and Survivors Insurance and Disability Insurance
Trust Funds.  (See table I.1.)

                               Table I.1
                
                 Economic and Demographic Intermediate
                              Assumptions

                                                                  Year
                                                                ultima
                                                                    te
                                                        Ultima   value
                                                            te  attain
Assumption                                               value    ed\a
------------------------------------------------------  ------  ------
Annual percentage
----------------------------------------------------------------------

Labor force participation
----------------------------------------------------------------------
Women                                                     60.6    2075
Men                                                       73.8    2075
Unemployment rate                                          5.5    2009
Inflation rate                                             3.3    2007
Labor productivity growth rate                             1.3    2008
Growth rate of wages as share of compensation             -0.2    2008
Growth rate of hours worked                               -0.1    2008
Nominal interest rate                                      6.3    2007
Mortality rate decline                                     0.6    2023

Annual number
----------------------------------------------------------------------
Total fertility rate                                     1.9\b    2023
Net immigration                                         900,00    1999
                                                           0\c
----------------------------------------------------------------------
Note:  The intermediate assumptions represent the trustees' best
estimates of likely future economic and demographic conditions. 

\a The ultimate value is maintained for the remainder of the 75-year
projection period. 

\b Number of children per woman. 

\c Number of persons per year. 

We actuarially adjusted the benefits as appropriate when the NRA and
EEA changed.  We also needed to make assumptions about the behavior
of program participants--that is, the ages at which workers elect to
receive Social Security benefits. 

Most workers begin receiving benefits at either age 62, the earliest
age when benefits can be received, or at age 65, the age when full
benefits can be received.\54 The Office of the Chief Actuary at the
Social Security Administration, in its projections, assumes that the
average age for receiving initial benefits increases by 3 months each
time the NRA increases by 1 year.  Because of the way the
EBRI-SSASIM2 model is structured, we incorporated this assumption
into the model by assuming that workers do not change their
retirement behavior as the NRA increases first to 66 and then to 67. 
That is, workers are assumed to continue to retire primarily at age
62 or 65, even though the level of initial benefits received at those
ages will decline as the NRA increases.  This assumption enabled us
to replicate the estimates for the actuarial balance under current
law made by the Office of the Chief Actuary.  We further assumed that
when the NRA increased to ages greater than 67, workers originally
receiving benefits at age 62 would continue to do so.  However, we
also assumed that persons originally receiving benefits at age 65
would now choose to receive benefits at the new NRA--that is, at ages
68 or older, depending on the option and year.  These assumptions
enabled us to replicate estimates made by the Office of the Chief
Actuary on similar policy options. 

(See figure in printed edition.)Appendix II

--------------------
\52 We consulted with the model's developer, Martin Holmer of Policy
Simulation Group Inc., in using the model to conduct our own
simulations. 

\53 We also estimated a change in the EEA to age 64 with the
currently mandated change in the NRA to age 67. 

\54 Benefits received at age 62 are actuarially reduced to compensate
for the greater number of years they are received, assuming a normal
life span.  Actuarial reduction ensures that lifetime benefits
received remain approximately the same, regardless of when workers
retire. 

COMMENTS FROM THE SOCIAL SECURITY
ADMINISTRATION
=========================================================== Appendix I

(See figure in printed edition.)

*** End of document. ***