When Social Security was first enacted, the United States was undergoing the Great Depression, during which many lost their lifetime savings. As the elderly had little ability or time to rebuild these losses, this devastated people who expected to retire on their life savings. At the same time, there were not widely available private company pensions. As a result, the Great Depression caused widespread poverty among the elderly. Today, this is not the case. In part due to more widespread financial markets and private pensions, and longer working careers that generate more lifetime savings, the elderly have lower rates of poverty than the rest of society. As a matter of fact, relative to children, the elderly are half as likely to be in poverty.
Analyze how each of the following hypothetical policy changes would affect people's decision to retire. Would the change induce people to retire sooner or later? Explain your reasoning.
(a) An increase in the age at which once can receive full Social Security benefits (currently age 66 to 67, depending on the year in which a person was born)
(b) A decrease in the fraction (currently 75 percent) of full benefits that one can receive if retirement occurs at age 62.
(c) An increase in the Medicare eligibility age from its current level of 65
(d) An increase to 100 percent from its current 85 percent in the maximum fraction of Social Security benefits that is subject to the federal income tax.