and health care costs, but also more resources will be freed up to pay for the education of the young.
Of course, there may be trade-offs for later retirement ages. Data from the Health and Retirement Study show that roughly one-fourth of workers aged 60–61 report a health condition that limits their work capability. Raising the early retirement age would delay benefit eligibility and might lead older people with job-limiting health conditions to seek disability insurance rather than waiting to claim retirement. Raising the full retirement age would reduce retirement benefits for people who retire early and might generate a financial incentive to seek disability insurance benefits, which are not reduced (Government Accountability Office, 2010).
Nevertheless, two key ingredients are critical to facilitating longer working lives. First, penalties on work at older ages—found in the provisions of many employer-provided DB pension plans and in many national social security programs—that encourage older people to leave the labor force would have to be eliminated. In the United States these provisions have been reduced by the conversion to 401(k) and other personal retirement accounts. But DB pension plans are still common for state and local employees, who typically have very generous plans with strong inducements to retire early. Second, a false rationale—the assumption of a fixed number of jobs in the economy—used to maintain provisions that encourage older people to leave employment would have to be abandoned. In addition, it will be important to understand which work arrangements, such as flexible working hours, would facilitate work by older persons and to assess the potential of employers to accommodate such arrangements.
Finally, automatic adjustment of Social Security benefits may help accommodate the force of demographic change. Many analysts have suggested that retirement ages be indexed to longevity. By 2009, 13 out of 30 OECD countries had introduced automatic links of pension benefits to life expectancy in their public pension systems (OECD, 2009). Systems in Sweden and Italy link benefits to life expectancy, the dependency ratio, and wage growth. Germany has maintained a DB system but bases benefits on a “sustainability factor.” Annual benefit changes are determined by changes in gross earnings minus contributions to the pension system and by changes in the dependency ratio (Boersch-Supan, Reil-Held, and Wilke, 2007; Boersch-Supan and Ludwig, 2010). As noted elsewhere in this report, however, policies that link retirement ages (particularly the full retirement age) to overall life expectancy might lower benefits disproportionately for those with a shorter life expectancy, a less than desirable distributional effect.