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The Unemployment Effects of Proposed Changes in Social Security’s “Normal Retirement Age”

By Franklin A. Michello and William F. Ford

Franklin A. Michello is an associate professor of finance at Middle Tennessee State University. He has been a visiting professor in Japan, China, and South Africa. He is a member of the Financial Management Association and other professional organizations. He received his Ph.D. from The University of Alabama.

William F. Ford holds the Weatherford Chair of Finance at Middle Tennessee State University. Previously, he held appointments at the University of Denver and within the banking industry, including president of the Federal Reserve Bank of Atlanta. He received his Ph.D. from the University of Michigan.

This paper identifies and analyzes an inherent conflict between some proposed U. S. Social Security reform measures, which would encourage delayed retirement decisions, and the objective of minimizing the economy’s unemployment rate. Using recent demographic trends in the age composition of the U.S. labor force, the study suggests that such proposed U.S. Social Security reform measures may actually increase the economy’s unemployment rate. It concludes that measures to encourage older workers would relieve labor market pressures (while also helping the Social Security system) if and only if unemployment was persistently near the non-accelerating inflation rate of unemployment (NAIRU). However, in an economy with above NAIRU unemployment, which has been the case most often in recent years, the opposite Social Security policy logic would apply.

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