Why Is 65 the Default Retirement Age?
Have you ever wondered why retirement in the U.S. is considered to start at age 65? After all, there’s nothing sacrosanct about that particular age. Most people are capable of working well beyond 65, while many of those fortunate enough to have amassed sufficient wealth prior to reaching that milestone are happy to retire earlier from a career-oriented lifestyle.
According to the Social Security Administration’s website, the first country to create a social insurance program for retirees was Germany in the 1880s. The emperor at the time (William I) wrote a letter to Parliament stating “. . . those who are disabled from work by age and invalidity have a well-grounded claim to care from the state.” Quite a radical idea back then! Initially created to begin at age 70, by 1916 the age limit had been reduced to 65.
When the U.S. began development of its own social insurance program after the Depression, there were numerous state and private pension systems in existence as well as the German model. Half of them started at age 65 and half at age 70. Actuarial studies indicated that using age 65 as the trigger could produce a self-sustaining manageable system with only modest levels of payroll taxation, so the planners settled on that age.
A common belief is that the Social Security program, introduced in 1935, was designed in such a way that people would not live long enough to collect benefits, since life expectancy at birth in 1930 was only 58 for men and 62 for women. But the low life expectancy was skewed in large part due to a high infant mortality rate. For citizens reaching age 21 at that time, over 50% of males and 60% of females were statistically expected to reach age 65, and those that made it were expected to live for another 12 and 14 years respectively. In fact, in 1935 there were already 7.8 million Americans age 65 or older.
Another myth is that over the past eight decades the increase in life expectancy due to improved medical support and healthier lifestyles is the primary threat to the financial stability of Social Security. While it is certainly a factor, the growth in the number of retirees together with the declining proportion of workers to beneficiaries has had a much larger impact on Social Security’s future financial condition.
During the early 1980s, rampant inflation helped drive the Social Security trust fund close to bankruptcy. As a result Congress found it necessary to raise Social Security withholding taxes and to schedule increases in the eligible age for benefits. Since 2005 the full retirement age (FRA) for Social Security had increased to 66. And for those turning age 62 this year, their FRA will be age 66 and 4 months. By 2027 the FRA for everyone will become 67. So at this point it’s fair to say that the official retirement age in the U.S. is no longer 65.
The great thing about our society today is that there is a plethora of activities available to seniors, making retirement a potentially wonderful experience for those fortunate enough to be able to afford it. However, Social Security these days barely provides enough funding even for basic living expenses, particularly for those of us residing in the Bay Area. We each need to accumulate and grow our savings to ensure our retirement will be enjoyable. Which is why the importance of good retirement planning cannot be overemphasized.