Why Raising The Retirement Age Is A Horrible Idea, Part 2

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First, read John's post from earlier today on why raising the retirement age for Social Security is the worst idea ever. He's exactly right, it is. But it's not just a terrible idea for Social Security recipients; it's a terrible idea for business. Especially small business.

What many don't know is this: When tweaks are made to Social Security, they ripple through the entire benefits universe, including private pension plans, union pension plans, 401k plans, and related deferred compensation benefits. When the Social Security retirement age was raised in the '80s, it required every employer and union plan to be redesigned and amended at considerable expense.

Worse yet, it required that benefits earned by employees through the old retirement age be retained, with benefits earned after the new retirement age kicked in to be added on as a new "layer," which actually increases costs for many employees.

This principle plays in the current debate too, whether it's 401k plans or Defined Benefit plans (such as they are). All earned benefits in defined benefit plans must be equivalent at the new retirement date, but many of them have been calculated using interest rates far higher than the ones in effect now -- around 8 percent. Recalculation would have to be done at a lower interest rate, resulting in higher monthly benefits payable at a later age. 401k plan investments would have to be adjusted for a longer time horizon, exposing participants to even higher risks.

All of these small changes play out as expensive modifications. The only people who benefit are lawyers and third party administrators, who have to carry out the changes. By the way, this is also true of the chained CPI modifications to benefits, only it has a smaller effect on rank and file employees' pensions and a larger effect on highly-paid employees' pensions. It ripples through to contribution limits on 401k and Profit Sharing plans, Defined Benefit limits, CPI adjustments to SEP/IRA limits and other benefit-related limits, both private and public.

Social Security does need to be changed. The disability portion of the fund will run out in approximately 6 years. The Old Age part will be about 70 percent funded in 2037. That's not a disaster, but I would much rather see some wise changes now than crisis planning in 10 years. The issue can't be framed around all or nothing. Instead, it should be around how best to change it in a way that will benefit current and future beneficiaries. Experts agree on the following:

  • Benefits need to be adjusted.
  • The current wage base is inadequate because it causes the burden of the cost of Social Security to fall on those least able to afford it. It should be raised to the level that was intended: 90 percent of average payroll, which would mean a payroll tax on approximately $230,000 instead of $106,000 as it is today.
  • Trust fund solvency must rely on a revenue increase. It cannot be mended by benefit cuts alone.
  • Privatizing any portion of Social Security will drive the deficit sky-high.

These are just a few of the reasons extending the retirement age would be a disaster from the viewpoint of private retirement plans. There are more, like the fact that in these economic times, people over the age of 50 have a difficult time being hired when there are younger, less expensive workers available. They're already stretching everything they have, and will likely exhaust any 401k benefits before they reach current retirement ages. What will we do with a generation full of destitute people? Republicans would have them tossed out of their homes onto the street where they can sneer at them for being welfare leeches. But if they cannot be hired, cannot work, and have inadequate savings to bridge the gap through retirement, that's exactly what will happen.

One solution to dealing with the shortfall? Repealing the high-end Bush tax cuts and earmarking the revenue for Social Security. Of course, we don't have a Congress with the courage to do that right now, so other ways may come into play. Some are better than others. None are perfect. But raising the retirement age doesn't solve anything for government and business alike.

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