The Impact of Later Retirement on Government Budgets

What would be the impact on the federal budget of a rise in the average U.S. retirement age, assuming that delayed retirement occurs without any change in current program eligibility requirements or benefit formulas? This paper offers estimates of the impact based on analysis of tax and expenditure changes that would occur if American workers delayed leaving employment. The average retirement age is already increasing, a trend that Social Security forecasters expect to continue. However, the Social Security forecast envisages a sharp slowdown in the recent trend toward later workforce exit. Under the alternative considered in this paper, the 1990-to-2010 trend toward later retirement is assumed to continue unchanged through 2040. The results suggest that later retirement under this scenario would modestly improve the long-term budget outlook. The proportional impact on the deficit would only be large if the future deficit is comparatively small, say, 1% to 2% of future GDP. In that case, however, the federal deficit does not represent a major economic problem. A retirement-age delay would have other beneficial effects, however. In particular, it would boost the net incomes of many active and recently retired workers in their late 60s and early 70s and would have particularly favorable effects on aged Americans who would otherwise have modest retirement incomes.