MAKING AMERICA WORK
Despite the fact that life expectancies have increased, workers are retiring earlier. For example, Figure 14 shows that the labor force participation rate for men over age fifty-five fell dramatically from 1950 to the mid-1980s, and it has increased only slightly since then.
Of course, it’s great that we are living longer, and it’s wonderful that we can expect to have long and leisurely retirements. But it has led to the current financing problem. Social Security must either find new sources of revenue or cut benefits.
Worse still, the current system generally discourages elderly individuals from working. The availability of Social Security benefits at age sixty-two is a powerful incentive to retire. Moreover, once an individual has worked thirty-five years in Social-Security-covered employment, he or she is unlikely to see much of an increase in benefits from working longer.
Continuing to work can also subject elderly individuals to confiscatory tax rates. Those who work past age sixty-two must pay income taxes and Social Security payroll taxes on their additional earnings. Many will also have to pay income tax on up to 85% of their Social Security benefits, and many more will lose up to one dollar of benefits for every two dollars of earnings, because of the so-called Social Security retirement earnings test. Not surprisingly, more than 56% of the elderly retire as soon as they can — at age sixty-two — and nearly 80% claim their benefits by age sixty-five. The average age at which workers claim their Social Security benefits has fallen from 68.5-years-old in 1950 to just 63.6-years-old today.