CBO: What Happens if Medicare & Social Security Eligibility Ages are Raised?

The Congressional Budget Office recently examined the effects of raising the eligibility ages for Social Security and Medicare at the same time, since life expectancy has increased and doing so would reduce federal expenditures, but ultimately concluded that lack of evidence prevents it from predicting the “sign or magnitude of the interaction effects if the ages were increased simultaneously.”

Projections by the CBO show the Social Security and Medicare benefits programs running out a few years earlier than expected, not long after the number of 65+ households is expected to increase by 35% in 2020, U.S. census data shows.

While the Social Security program isn’t expected to face shortfall until about 2036, the Medicare fund is projected to be exhausted by 2024, according to the Social Security and Medicare Boards of Trustees.

The current Medicare eligibility age is 65, and if this were to be raised, then fewer people would qualify and federal expenditures for the program would decrease relative to what’s been projected under current law, says the CBO.

The course of action examined by the CBO is if the Medicare eligibility age (MEA) were to be increased by two months every year, beginning in 2014 for people who were born in 1949, until it reaches the age of 67, in 2027, for people born in 1960.

What would happen, the CBO expects, is that most of those affected by the eligibility change would get health insurance from another source, such as their employers, or through another government program.

However, there would be a portion of the affected population that would end up without any health insurance, and it’s likely that federal spending on other programs would increase and partially offset any savings to the Medicare program.

“Raising the MEA would reduce outlays for Social Security retirement benefits in the short term by inducing some people to wait to claim benefits—some people apply for Social Security and Medicare at the same time—and by encouraging some workers to delay retirement so they can maintain access to employment-based health insurance,” the CBO reports. “However, because delayed claiming results in monthly benefits that are higher by an amount that is roughly actuarially fair, the long-term effect on Social Security benefits would be minimal.”

Following the higher MEA schedule, federal Medicare expenditures would be reduced by $148 billion from 2012 through 2021, and by 2035, net spending would be about 5% beneath what it’s currently projected to be, at 4.7% of the gross domestic product (GDP) instead of 5%.

The CBO also examines raising the early eligibility age (EEA) for Social Security from the current 62 to 64. While federal expenditures for this program would decrease in the short term, it would end up paying out higher monthly benefits over time for those who hold off on applying.

“Eventually, as average life expectancy increased, the higher benefits associated with later claiming would more than offset the savings for the beneficiary with an average lifespan, so lifetime benefits would increase,” says the CBO. “Federal outlays would therefore increase as well, unless reduction for claiming benefits early was increased as life expectancy grew.”

The report brief goes on to discuss the budgetary effects of raising the full retirement age (FRA) to 70 for workers born in 1973 or later, which would shrink federal expenditures by $120 billion through 2021.

If all three ages—the MEA, EEA, and FRA—were to be raised simultaneously, people would have more incentive to remain in the workforce longer, and so federal outlays would be reduced at the same time that revenues would go up.  However, the CBO says it can’t predict the effects of doing so, and says that “in the absence of evidence on the issue, CBO assumes that the effects of simultaneous increases in the eligibility ages would equal the sum of the effects of increasing each age separately.”

Ultimately, according to the schedules the office examined, “If all three ages of eligibility were increased according to the schedules described above, then the size of the labor force and GDP in 2035 would be about 2% larger than under current law, and federal revenues would be about half a percent of GDP higher. By 2060, the size of the labor force and GDP would be almost 3% larger than under current law, and federal revenues would be about three-fourths of a percent of GDP higher.”

View the report brief here.

Written by Alyssa Gerace

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