Social Security Reform: Raising Retirement Ages Improves Program Solvency
but May Cause Hardship for Some (Testimony, 07/15/98, GAO/T-HEHS-98-207).

Pursuant to a congressional request, GAO discussed raising the
retirement age for social security benefits, focusing on: (1) how
raising the retirement ages could affect social security's long-term
solvency and the U.S. economy; (2) how the labor market for older
workers might respond to these changes; and (3) the possible impacts
from raising the retirement ages on the Disability Insurance (DI) and
Supplemental Security Income (SSI) programs.

GAO noted that: (1) raising the retirement ages does appear to improve
the social security program's long-term solvency and could increase the
nation's economic output; (2) raising the ages at which individuals can
draw benefits creates incentives for workers to remain in the labor
force, thereby increasing revenues to the trust fund and decreasing the
amount of benefits paid; (3) the majority of older workers, aged 62 to
67, do not appear to have health limitations that would prevent them
from extending their careers, and thus their labor force participation
should increase as the retirement ages are raised; (4) this greater
labor force participation should raise the level of economic output as
more people work longer; (5) however, the extent to which labor force
participation increases depends on whether sufficient jobs are available
for older workers; (6) employees may be willing and able to extend their
careers, but it is unclear whether employers will be willing to retain
or hire them because of negative perceptions about costs and
productivity; (7) blue-collar workers may be disproportionately affected
by these labor demand and supply factors because they are at greater
risk for incurring certain health problems that could limit their
ability to remain in the labor force; (8) for example, workers in poor
health who otherwise might have kept working until they qualified for
social security retirement benefits may opt to apply for DI, which could
increase costs to this program; and (9) in addition, SSI could also
experience increased participation and higher costs because some
individuals will be dually eligible for DI and SSI.

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

 REPORTNUM:  T-HEHS-98-207
     TITLE:  Social Security Reform: Raising Retirement Ages Improves 
             Program Solvency but May Cause Hardship for Some
      DATE:  07/15/98
   SUBJECT:  Social security benefits
             Disability benefits
             Retirement benefits
             Eligibility criteria
             Income maintenance programs
             Labor force
             Health statistics
             Labor statistics
IDENTIFIER:  Medicare Program
             Social Security Trust Fund
             Census Bureau Survey of Income and Program Participation
             Supplemental Security Income Program
             Social Security Disability Insurance Program
             SIPP
             
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Cover
================================================================ COVER


Before the Special Committee on Aging, United States Senate

For Release on Delivery
Expected at 1:30 p.m.
Wednesday, July 15, 1998

SOCIAL SECURITY REFORM - RAISING
RETIREMENT AGES IMPROVES PROGRAM
SOLVENCY BUT MAY CAUSE HARDSHIP
FOR SOME

Statement of Barbara D.  Bovbjerg, Director
Income Security Issues
Health Education, and Human Services Division

GAO/T-HEHS-98-207

GAO/HEHS-98-207T


(207003)


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

  ADEA - Age Discrimination in Employment Act
  DI - Disability Insurance
  ERA - early retirement age
  HRS - Health and Retirement Study
  NRA - normal retirement age
  SIPP - Survey of Income and Program Participation
  SSA - Social Security Administration
  SSI - Supplemental Security Income

SOCIAL SECURITY REFORM:  RAISING
RETIREMENT AGES IMPROVES PROGRAM
SOLVENCY BUT MAY CAUSE HARDSHIP
FOR SOME
============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

Thank you for the opportunity to speak about raising the retirement
age for Social Security benefits.  Many of the proposals before the
Congress to mitigate Social Security's long-term financial shortfall
of nearly $3 trillion dollars contain a provision to raise either the
normal retirement age (NRA), currently 65, the early retirement age
(ERA), currently 62, or both.  Increasing retirement ages is
envisioned to help alleviate the financing problem by increasing the
amount individuals pay into the Social Security trust fund and
reducing the amount of benefits they draw out. 

Today, I would like to discuss (1) how raising the retirement ages
could affect Social Security's long-term solvency and the U.S. 
economy, (2) how the labor market for older workers might respond to
these changes, and (3) the possible impacts from raising the
retirement ages on the Disability Insurance (DI) and Supplemental
Security Income (SSI) programs.\1 My testimony is based on our
ongoing work for your Committee in which we are analyzing data from
the Social Security Administration (SSA), two nationally
representative surveys, and the literature on Social Security. 

In summary, raising the retirement ages does appear to improve the
Social Security program's long-term solvency and could increase the
nation's economic output.  Raising the ages at which individuals can
draw benefits creates incentives for workers to remain in the labor
force, thereby increasing revenues to the trust fund and decreasing
the amount of benefits paid.  The majority of older workers, aged 62
to 67, do not appear to have health limitations that would prevent
them from extending their careers, and thus their labor force
participation should increase as the retirement ages are raised. 
This greater labor force participation should raise the level of
economic output as more people work longer.  However, the extent to
which labor force participation increases depends on whether
sufficient jobs are available for older workers.  Employees may be
willing and able to extend their careers, but it is unclear whether
employers will be willing to retain or hire them because of negative
perceptions about costs and productivity.  Blue-collar workers may be
disproportionately affected by these labor demand and supply factors
because they are at greater risk for incurring certain health
problems that could limit their ability to remain in the labor force. 
For example, workers in poor health who otherwise might have kept
working until they qualified for Social Security retirement benefits
may opt to apply for DI, which could increase costs to this program. 
In addition, SSI could also experience increased participation and
higher costs because some individuals will be dually eligible for DI
and SSI. 


--------------------
\1 DI provides cash benefits to workers who, having worked long
enough and recently enough to be insured under DI, become unable to
work.  SSI is a means tested income assistance program for disabled,
blind, or elderly individuals regardless of their prior participation
in the labor force. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

The Social Security Act was enacted in 1935 during the Great
Depression as a social insurance program to provide an income
foundation upon which individuals could build for their retirement
years.  In 1956, the DI program was added to Social Security to
provide income to disabled workers.  Over the years, the three main
components of retirement income--Social Security, pensions, and
savings--have dramatically improved the income of the elderly,
thereby substantially reducing their poverty rates.  According to SSA
data, Social Security benefits constitute approximately 80 percent of
total income for elderly households (households in which the head of
household is aged 65 or older) in the lowest two-fifths of the income
distribution, compared with only 21 percent of total income for
households in the highest fifth. 

The Social Security Act established 65 as the minimum age at which
retirement benefits can be obtained.  Sixty-five was selected as a
compromise between age 60, which appeared too low from a cost
standpoint, and age 70, which appeared too high given that life
expectancy at the time 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 ERA and 65 is considered the NRA. 

The long-term financing problem that Social Security faces is largely
a result of lower birth rates and increasing longevity.  One way to
at least partially compensate for these changes is to raise the
retirement ages.  The Congress has already approved one 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 the
year 2000.  Currently, there are proposals before the Congress to
raise the retirement ages further by increasing the ERA from 62 to
65, along with several proposals to further increase the NRA from 67
to 70.  Longer life expectancy and the improved health of the
nation's elderly are the primary justifications for these recommended
increases. 


   RAISING THE RETIREMENT AGES
   IMPROVES SOCIAL SECURITY
   SOLVENCY AND COULD INCREASE
   ECONOMIC OUTPUT
---------------------------------------------------------- Chapter 0:2

Raising the retirement ages effectively reduces benefits and thereby
would improve Social Security's solvency.  The extent of the
improvement depends on how much and how soon the retirement ages are
raised.  Because individuals retiring before the NRA receive lower
benefits and those retiring after the NRA receive a premium, raising
the NRA reduces the initial benefits for all retirees.  For example,
if the NRA was increased to 70, people who retire between ages 65 and
69 would have their benefits reduced for early retirement.  And those
who retire at age 70 would then receive the basic benefit amount now
received at 65 instead of receiving the premium for delayed
retirement. 

SSA's actuaries estimate that increasing the NRA from 65 to 69 over
the years 2000 through 2015, and raising the ERA at the same rate,
would close over one-half of the long-term trust fund shortfall and
thereby extend the period of projected solvency by 13 years.  If the
NRA and ERA were further increased at the rate of 1 month every 2
years starting in 2016, then depletion of the fund would not occur
for an additional 5 years (because 19 percent more of the shortfall
would be made up).  The combined effect of these retirement age
increases would eliminate 72 percent of the difference between the
Social Security trust fund's revenues and outlays over the next 75
years. 

Raising the retirement ages also could lead to an increase in
economic activity if people worked longer.  By remaining in the work
force, older workers would be increasing the number of their
productive years.  In effect, there would be an increase in the
economy's resource base--in this case, society's stock of human
resources--and these increased resources would allow the economy to
produce more goods and services.  However, the increase in economic
activity assumes that, by remaining in the labor force for more
years, older workers would not be displacing younger workers . 


   RAISING RETIREMENT AGES
   PROVIDES INCENTIVES FOR WORKERS
   TO EXTEND THEIR CAREERS, BUT
   THEIR PARTICIPATION AND THE
   DEMAND FOR THEIR LABOR ARE
   UNCERTAIN
---------------------------------------------------------- Chapter 0:3

Raising the Social Security retirement ages would provide many
individuals an incentive to work longer, but whether they do depends
on how the labor market responds.  Having people work longer would
help solve the problem of the declining ratio of workers to retirees. 
Working longer could also give workers more time to save and to
accrue pension benefits.  Still, it is unclear whether workers will
want to work longer and whether employers will want to retain or hire
them.  For many years, Americans have been choosing to receive Social
Security benefits earlier, although the decline in the average age at
which people elect to receive benefits has leveled off since the
1980s.  In 1940, the average age for drawing Social Security benefits
was 68.8, but by 1985 it had fallen to 63.7, where it remains today. 
Less than one-sixth of men aged 65 and over are in the labor force
today, compared with nearly half in 1950.  In addition, life
expectancies have increased by nearly 12 years for men and 14 years
for women since 1940.  The combination of decreasing retirement ages
and increasing life expectancies means that people are spending an
increasing proportion of their lives in retirement. 

Data from the Survey of Income and Program Participation (SIPP)\2
shows that approximately 22 to 31 percent of men aged 62 to 67 report
that they have a disability that limits their ability to work.  These
data suggest that although a substantial portion of the population
may have difficulty continuing to work to later ages, the majority of
people have the capability to work beyond the current ERA and NRA. 

Social Security policy is a factor that affects individuals' choice
of when to retire.  Social Security currently gives incentives for
individuals to reduce their working hours once they reach ages 62 or
65.  Individuals make their decisions to work based primarily on the
trade-off of earnings versus leisure time.  The availability of
Social Security benefits allows workers to substitute their earnings
with nonlabor income and to take more leisure time.  The majority of
workers (53 percent) take Social Security benefits at age 62, the
first year they are eligible.  Also, individuals tend to retire more
often at ages 62 and 65 than at any other ages, suggesting that the
ERA and NRA influence the decision on when to retire.\3

Social Security, however, is only one of the factors influencing the
retirement decision.  Other factors are employer-provided benefits,
household wealth, and the employee's health status.  Research
suggests that the decision to retire is based primarily on financial
considerations.  One recent study, by Burkhauser and others, examined
the effects of raising the ERA and concluded that such an increase
would have only a limited impact on individuals in poor health
because the majority of people who retire at the ERA do so because
they are financially able to do it.\4 This study suggests that
raising the ERA would, on average, deny Social Security benefits to
people who could work longer and not take benefits away from
unhealthy individuals who retire early because they can no longer
work.\5

This research concludes that raising the ERA and the NRA should lead
to individuals working longer, but those who cannot work longer may
see their household income decline.  In households with two or more
income earners, the healthy member(s) of the household may be able to
work longer to offset some or all of the lost Social Security
benefits.  However, households without this option could experience
large declines in their income if the retirement ages are raised. 
For some households, this decline in income could be sufficient to
push the household below the poverty level. 

Labor force participation is not solely the workers' decision--there
must also be an effective demand for their labor.  Employers'
perceptions may form potential barriers to older workers' retaining
their current jobs, finding new jobs if they are laid off, or whether
they need to reenter the work force after retiring because their
retirement income is inadequate.  While older workers have positive
attributes such as experience and good judgment, there are a number
of reasons that employers might not want to employ them.  For
example, employers incur higher benefit, recruitment, and training
costs for older workers.  Recent evidence indicates a negative
relationship between the employer provision of health care benefits
and the hiring of older workers.\6 The researchers who found this
negative correlation speculated that it is the result of the Age
Discrimination in Employment Act (ADEA), which mandates that firms
must offer workers with similar experience the same level of
benefits.  Since younger employees are less costly to insure, firms
will prefer them. 

The potential tenure with an employer is another obstacle to hiring
older workers because of recruitment and training costs.  Recruitment
involves job advertising costs and interview time.  Newly hired
employees may also require significant training to perform their new
job.  If these costs are substantial, they can serve as barriers to
hiring older workers.  Firms would be more likely to invest in
younger workers because they have the potential to remain with the
firm for a longer period, which reduces the average costs of
recruitment and training.\7

A final obstacle that older workers face is a negative perception
among employers about their productivity.  Surveys find that most
managers believe the negative aspects of older workers outweigh the
positive aspects.  The productivity traits of older workers that
managers tend to find favorable are experience, judgment, commitment
to quality, low turnover, and good attendance and punctuality.  The
negative perceptions that managers have about older workers'
productivity are a tendency toward inflexibility, an inability to
effectively use new technology, difficulty in learning new skills,
and concerns about physical ability.\8

The effect of the factors highlighted above--(1) health care costs,
(2) recruitment and training costs, and (3) perceptions about
productivity--is that older workers may have fewer job opportunities
compared with younger workers.  If unemployment rates rose, older
workers could be disproportionately affected.\9 An older worker who
is displaced from a job will have greater difficulty finding another
one compared with a younger worker because of these obstacles.  This
situation, rather than a desire to retire, could discourage an older
worker from remaining in the labor force. 


--------------------
\2 The SIPP is a nationwide data set compiled by the U.S.  Bureau of
the Census to evaluate the effectiveness of existing federal, state,
and local programs. 

\3 C.J.  Ruhm, "Secular Changes in the Work and Retirement Patterns
of Older Men," Journal of Human Resources, Vol.  20, No.  2 (1992),
pp.  362-85. 

\4 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. 

\5 The Burkhauser study is the culmination of a shift in the focus of
research on why people retire away from health considerations and
toward financial determinants.  In 1990, Quinn and others 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.:  Upjohn Institute for Employment Research). 
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 an
individual's retirement decision.  A 1990 study by Richard A. 
Ippolito ("Toward Explaining Early Retirement After 1970," Industrial
and Labor Relations Review, Vol.  43, No.  5 (July 1990), pp. 
556-69) attributes a 20-percent decline in labor force participation
among men aged 55 to 64 from 1970 through 1986 mostly to a 50-percent
increase in Social Security benefits in the 1970s and changes in
employer-sponsored pension plans that favored early retirement. 

\6 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. 

\7 R.M.  Hutchens, "Do Job Opportunities Decline With Age?"
Industrial and Labor Relations Review, Vol.  42, No.  1 (1988), pp. 
89-99. 

\8 M.C.  Barth, "Older Workers:  Perception and Reality," (paper
delivered by Executive Vice President, ICF Kaiser International
Consulting Group, at the U.S.  Senate Special Committee on Aging
Forum, July 25, 1997). 

\9 K.  Leppel, S.H.  Clain, "The Effect of Increases in the Level of
Unemployment on Older Workers," Applied Economics, Vol.  27 (1995),
pp.  901-906. 


      BLUE COLLAR WORKERS MAY BE
      MORE ADVERSELY AFFECTED BY
      AN INCREASE IN THE
      RETIREMENT AGES
-------------------------------------------------------- Chapter 0:3.1

Blue-collar workers will likely experience more difficulties in
extending their careers than will white-collar workers.\10 Because of
the nature of their jobs, many older blue-collar workers--who compose
40 percent of the labor force between the ages of 53 and
63--experience health problems that may inhibit their ability to work
and reduce the demand for their labor.  We analyzed the Health and
Retirement Study (HRS), a nationally representative sample composed
of individuals born between 1931 and 1941, to compare the health
status of blue- and white-collar workers.\11

Our analysis found that older blue-collar workers are at greater risk
for having several health problems compared with older white-collar
workers (see table 1).  We assessed the effects of occupation on
specific health problems, controlling for employment status, age,
race, sex, alcohol consumption, and smoking.\12 Blue-collar workers
are more likely to have musculoskeletal problems, respiratory
diseases, diabetes, and emotional disorders than are white-collar
workers.  For example, blue-collar workers are 58 percent more likely
to have arthritis, 42 percent more likely to have chronic lung
disease, and 25 percent more likely to have emotional disorders. 
White-collar workers were not at greater risk for having any of the
health problems we examined.  White-collar workers did have higher
rates of cancer; however, the difference was not statistically
significant. 



                                Table 1
                
                 Health Outcomes of Blue-Collar Workers
                Compared With White-Collar Workers (Aged
                            53-63), 1994 HRS

                                                         Frequencies
                                                        (percentages)
                                                        --------------
                                                  Odds
                                                 ratio
                                                    of
                                                health
                                                condit
                                                   ion
                                                   for
                                                 blue-
                                                collar
                                                occupa   Blue-  White-
Dependent variable--health condition\a            tion  collar  collar
----------------------------------------------  ------  ------  ------
Arthritis                                       1.583\   45.1%   37.8%
                                                     b
Foot/leg problem                                1.302\    28.3    24.2
                                                     b
Back problem                                     1.108    27.3    25.4
Chronic lung disease                            1.423\     9.0     6.6
                                                     c
Asthma                                          1.328\     4.8     4.3
                                                     d
Diabetes                                        1.207\    12.2     8.8
                                                     d
Cancer (other than skin)                         1.096     5.1     6.4
Hypertension                                     1.048    42.9    39.2
Kidney/bladder problem                           1.140     7.2     6.2
Stomach/intestine ulcer                          1.254     6.5     4.9
Heart problem                                    0.932    13.4    13.2
Stroke                                           0.926     2.2     1.9
Emotional problem                               1.245\    10.3     8.8
                                                     e
----------------------------------------------------------------------
Note:  Number of observations = 6,589. 

\a Independent variables are blue-collar occupation, completely
retired, partially retired, age, gender, race, smoking behavior,
alcohol consumption, and alcoholic tendencies. 

\b Statistically significant at the .0001 level. 

\c Statistically significant at the .001 level. 

\d Statistically significant at the .05 level. 

\e Statistically significant at the .01 level. 

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 2).  The blue-collar occupations with risk factors for pain
affecting performance are personal services; farming, fishing, and
forestry; mechanics and repair; construction; mining; precision
production; machine operator; transportation operator; and material
handler.  These occupations comprise one-third of workers aged 53 to
63. 



                                Table 2
                
                  Pain Affecting Ability to Do Normal
                   Work: Blue-Collar vs. White-Collar
                     Workers (Aged 53-63), 1994 HRS

                                                          Odds
                                                         ratio  Freque
                                                           for  ncy of
                                                          pain    pain
------------------------------------------------------  ------  ------
All blue-collar occupations                             1.813\   12.9%
                                                             a
All white-collar occupations                               Not     8.4
                                                        applic
                                                          able

Specific blue-collar occupation
----------------------------------------------------------------------
Cleaning services                                        1.145    11.1
Protection services                                      1.649    10.8
Food preparation services                                1.494    13.5
Health services                                          1.565    14.8
Personal services                                       1.632\    13.4
                                                             b
Farming, fishing, forestry                              1.710\    10.7
                                                             c
Mechanics and repair                                    2.061\    11.9
                                                             d
Construction and mining                                 2.428\    13.7
                                                             a
Precision production                                    1.588\    10.4
                                                             c
Machine operator                                        2.074\    15.1
                                                             a
Transportation operator                                 2.057\    12.5
                                                             a
Material handler                                        2.050\    13.2
                                                             b
----------------------------------------------------------------------
Notes:  Number of observations = 6,582.  Independent variables =
blue-collar occupation, completely retired, partially retired, age,
gender, and race. 

\a Statistically significant at the .0001 level. 

\b Statistically significant at the .01 level. 

\c Statistically significant at the .05 level. 

\d Statistically significant at the .001 level. 

Older blue-collar workers with health problems have lower earnings
and are in less demand for their labor.  Blue-collar work is often
physically demanding, and current or potential employers may foresee
a risk of a worker's compensation claim or increased health care
costs from older employees.  This reduced labor demand means these
workers may accumulate less wealth, which makes it difficult for them
to afford to retire even if they are not physically capable of
working more years.  For example, 18 percent of blue-collar workers
with two or more health problems are retired, while only 14 percent
of those with no problems are retired (see table 3). 



                          Table 3
          
            Older Blue-Collar Workers' Earnings,
             Retirement Rates, and Unemployment
             Rates, by Health Status, 1994 HRS

Number    Percenta  Percenta
of         ge with     ge of
health        this       all  Median  Percenta
problems    health     older  earnin        ge  Unemployme
\a          status   workers      gs   retired     nt rate
--------  --------  --------  ------  --------  ----------
0             36.8      14.7  $14,11      14.2         6.2
                                   4
1             32.4      13.0  11,616      15.8         7.7
2             20.3       8.1   8,524      18.4         8.2
3 or          10.5       4.2   3,278      19.8         9.4
 more
----------------------------------------------------------
\a Health problems for which blue-collar workers are at greater risk
(see table 1). 

Table 3 shows that older blue-collar workers with health problems had
higher unemployment rates than healthy blue-collar workers.  Our
analysis also showed that blue-collar workers had higher unemployment
rates than white-collar workers with similar health status. 
Corresponding to these higher unemployment rates, the blue-collar
workers with health problems had lower earnings.  The older
blue-collar workers who had arthritis, a foot or leg problem, chronic
lung disease, asthma, diabetes, or an emotional problem--all
conditions that blue-collar workers are at greater risk for having
compared with white-collar workers--have 38 percent, 33 percent, 27
percent, 36 percent, 25 percent, and 78 percent lower median
earnings, respectively, than blue-collar workers without these
conditions.  As noted earlier, these reduced earnings make it
difficult for unhealthy, older blue-collar workers to afford to
retire. 


--------------------
\10 The following categories of workers, as well as the percentage of
the labor force they constitute, were defined as "blue-collar" for
the purpose of our analysis:  cleaning services (1.0%); protection
services (1.8%); food preparation services (2.7%); health services
(1.9%); personal services (5.0%); farming, fishing, and forestry
(2.6%); mechanics and repair (3.8%); construction and mining (3.8%);
precision production (3.8%); machine operator (6.2%); transportation
operator (4.9%); and material handler (2.4%).  White-collar workers
were defined as those employed in managerial (17.4%), professional
specialty (16.4%), sales (9.9%), and clerical (16.2%) occupations. 
These data are from the Health and Retirement Study. 

\11 The HRS is compiled by the Institute for Social Research at the
University of Michigan.  We used Wave 2 of the HRS, conducted in
1994, for our analysis.  Wave 2 respondents are aged 53 to 63. 

\12 The logistic regression models we used were specified in J.S. 
Petersen and C.  Zwerling, ï¿½A Comparison of Health Outcomes Among
Older Construction and Blue-Collar Employees in the United States,ï¿½
American Journal of Industrial Medicine (1998, forthcoming). 


   THE EFFECT OF RAISING
   RETIREMENT AGES ON OTHER
   GOVERNMENT PROGRAMS
---------------------------------------------------------- Chapter 0:4

Given the health problems we have identified among older workers, an
increase in retirement ages and the corresponding reduction in
benefits may prompt more people to seek disability benefits.\13
Raising the ERA and NRA, without a corresponding change in DI
benefits, could encourage individuals in poor health to apply for
disability benefits, because the gap between retired worker benefits
and disability benefits would be increased.  For example, under
current law, retired worker benefits taken at age 62 after the NRA
has increased to age 67, will be 30 percent lower than the full
benefits available at age 67.  However, unless disability benefits
are adjusted after the NRA increase, workers who receive DI benefits
at 62 will not have their benefits reduced.  This means that DI
benefits awarded at age 62 will be 43 percent higher than retired
worker benefits awarded at that age.\14 Some of the individuals with
low income and assets who are awarded DI may also qualify for SSI
disability benefits. 

Another incentive for individuals to apply to the DI program is that
participants are eligible for medical coverage under Medicare 2 years
after DI benefits begin.  Thus, individuals awarded DI benefits
before age 63 get extra Medicare coverage that they would otherwise
not be eligible for until age 65.  Therefore, if Medicare eligibility
was raised along with the ERA and NRA, individuals would have an
incentive to try to attain DI benefits.  An additional medical
coverage issue is that individuals who are dually eligible for DI and
SSI benefits are also generally eligible to receive Medicaid, which
will increase costs to this program. 

Raising retirement ages would change some of the disincentives that
currently keep people from applying for DI benefits at age 62.  Data
from SSA show that the current structure of Social Security reduces
claims for new DI participators aged 62 to 64.  Figure 1\15 shows a
steady increase in the rate of new disability awards from ages 53 to
61.\16 The rate of new awards then drops substantially at age 62 and
falls further through age 64.  DI participation is likely discouraged
at ages 62 to 64 because of the application process and restrictions
on earnings.\17 There is a 5-month waiting period after the onset of
the disability until someone can apply for benefits, and the
application process is lengthy and complex.  In comparison, the
application process for Social Security retirement benefits is more
straightforward, given that the applicant meets the coverage and age
requirements.  In addition, DI benefits are generally subject to a
greater reduction than Social Security retirement benefits if
beneficiaries have any earnings.  Also, DI benefits are offset by
worker's compensation benefits, while Social Security retirement
benefits are not. 

   Figure 1:  New DI Awards as a
   Percentage of the DI-Covered
   Population, Ages 53-64

   (See figure in printed
   edition.)

If the ERA was raised to 65 and the NRA to 70, then the incentives
that apply to Social Security retirement benefits would be applicable
at age 65 rather than age 62.  Under this scenario, individuals aged
62 to 64 would have a greater incentive to apply for disability
benefits, and they would be expected to do so at rates comparable to
individuals at younger ages (55 to 61) under the present system. 
Figure 1 contains a trend line to indicate the expected rate of
change if the increase in new DI participation continues beyond age
62.  The trend in new DI participation among individuals aged 55 to
61 under the present system suggests that DI participation among
individuals aged 62 to 64 would increase approximately 2.5 percent if
the ERA was raised to age 65.  As noted earlier, some of these new DI
participants would be dually eligible for SSI and Medicaid
benefits,\18 which would impose additional costs. 


--------------------
\13 Once a person is on the DI or SSI rolls, benefits continue until
death; until SSA determines that the beneficiary no longer meets the
eligibility requirements; or, in the case of DI beneficiaries, until
their benefits are converted to Social Security retirement benefits
at age 65. 

\14 DI benefits will be 43 percent higher because the difference is
measured in percentage change.  An individual taking retired worker
benefits at 62 receives 70 percent of what he or she could get at the
NRA.  An individual taking DI benefits at 62 receives 100 percent of
the NRA benefits.  The percentage change from 70 to 100 is 43
percent. 

\15 Social Security Bulletin, Annual Statistical Supplement, Table
6.A4 (multiple years, 1993-96).  Predicted values are based on the
trend from ages 55 to 61. 

\16 Disability incidence rates are based on men only. 

\17 J.L.  Mashaw and V.  Reno, Balancing Security and Opportunity: 
The Challenge of Disability Income Policy (Washington, D.C.: 
National Academy of Social Insurance, 1996). 

\18 Individuals who receive SSI benefits are generally eligible for
Medicaid benefits.  Thus, increases retirement ages may also affect
the Medicaid program. 


   CONCLUDING OBSERVATIONS
---------------------------------------------------------- Chapter 0:5

Addressing Social Security's solvency problem is one of the most
important issues currently facing the administration and the
Congress.  Numerous proposals are before the Congress to restore the
balance between promised benefits and available funds.  Increases in
the ERA and NRA could make up a substantial amount of Social
Security's long-term financing shortfall, depending on the size of
the increases.  Increases in retirement ages may also have positive
economic effects by inducing individuals to extend their careers,
which could increase economic output.  Since life expectancies and
the health of the elderly are improving, many people have the
capability to work longer, and increasing retirement ages would
encourage this. 

While raising the retirement ages will extend the life of the Social
Security trust fund and could lead to higher levels of economic
output, the potential negative consequences should be recognized. 
For example, older workers who are laid off or need to reenter the
workforce after retiring may have difficulty finding a job. 
Blue-collar workers may experience these problems to a greater
degree, because the nature of their work leads to several health
problems that inhibit their ability to continue working to later
ages, compared with those in white-collar jobs.  These health
problems reduce their employability and hence their ability to
accumulate enough wealth to afford to retire if they are not
physically capable of working longer.  Finally, in considering
retirement age increases, the effect of this action on other
government programs needs to be understood.  Participation in
disability insurance programs will likely increase, primarily by
blue-collar workers, if retirement ages are raised.  The magnitude of
the increase depends on the extent to which individuals react to the
newly created incentives to apply to these programs. 


-------------------------------------------------------- Chapter 0:5.1

Mr.  Chairman, this concludes my prepared statement.  I will be happy
to answer any questions you or Members of the Committee may have. 


*** End of document. ***