Federal Reserve Chairman Alan Greenspan, who said last month that encouraging senior citizens to keep working is one way to help fix Social Security, at age 79 still draws a salary and pays taxes into the retirement program.

Like Mr. Greenspan, millions of older Americans are retiring later than in the past, reversing a trend toward earlier retirement dating from the 19th century. In the process, they’re doing on their own what Republicans and Democrats in Washington are bickering over: finding a way to help keep the 70-year-old retirement system funded.

As workers opt to stay on the job longer, raising the age of eligibility to receive full benefits from the program may become an ingredient of any Social Security legislation this year.

“From a standpoint of protecting the elderly, increasing the retirement age is among the least painful of any cuts that need to be taken,” says Eugene Steuerle, a senior fellow at the Urban Institute, an economic and social-policy research group in Washington. “If indeed people do work longer, they add more revenues to the system.”

Such a step would be politically difficult, as labor groups and AARP, the powerful seniors’ lobby, have opposed the idea. At the same time, there is a precedent: 22 years ago, with little advance warning, Congress approved a phased-in increase even over the objections of Rep. Claude Pepper, a Florida Democrat who at age 82 was one of the most powerful voices for senior citizens’ interests.

This time, some of the political pressure against raising the age may be eased by the very fact that Americans are working longer anyway. Older Americans are in the labor force at their highest rate since 1972, in part reflecting larger numbers of working women, according to the Labor Department. Last year, 36.2% of those 55 and older were either working or job-hunting, a jump from between 29.4% and 31.8% in the 1990s.

A University of Michigan study last year found that 42.4% of men and 36.4% of women aged 50 to 56 planned to work past 65, up from 29.5% of men and 22.7% of women in 1992. That translates into millions of workers continuing to pay taxes into the system during the next 20 years.

“Increasing labor force participation seems a natural response to population aging, as Americans not only are living longer but are also generally living healthier,” Mr. Greenspan told a Senate committee on aging last month.

Social Security changes in the 1980s penalized early retirement, and some workers stay on the job longer out of “economic necessity,” said a senior economist at Rand Corporation’s center for the study of aging in Santa Monica, Calif., Michael Hurd.

At the same time, employers have moved from offering pensions that reward early retirement to 401(k) plans that increase in value with more years of work. Last year, there were 31,238 active employer-sponsored pension plans, according to the Pension Benefit Guaranty Corporation, which insures such plans. Active plans peaked at 114,396 in 1985.

That was also the year of the lowest participation by seniors in the workforce: the average retirement age fell to 62, according to Gary Burtless, an economist at the Brookings Institution, a public-policy research organization in Washington. The average retirement age is now 63 and climbing, he says, and “we now have more people working in the 65 to 69 age range than we did in the mid-1980s.”

By 2012, 39.7% of those over age 55 will be part of the workforce, the Labor Department projects. Seniors 65 and older in the workforce are projected to reach 15.9% by 2012, up from 11.5% in 1992.

Working longer won’t by itself solve Social Security’s $4 trillion long-term projected deficit, Fed Governor Edward Gramlich says. Congress would have to change the law so that benefits are smaller for workers who collect Social Security early, said Mr. Gramlich, who was chairman of President Clinton’s Social Security Task Force.

Currently, workers who draw Social Security at age 62 receive 70% of full benefits. Over time, they collect the same amount of money as those who quit the workforce at 65.

Congress in 1983 raised the full retirement age to 67 from 65, a change that won’t be complete until those born in 1960 begin to retire. Senator Hagel, a Nebraska Republican, has proposed boosting the full retirement age to 68 immediately for people under 45 years old, which he says would save an estimated $600 billion, and shrinking benefits for those who retire at 62 to 63% of full benefits

Senators from both sides of the aisle have said raising the retirement age should be considered.

The federal retirement system is forecast to go into deficit – when benefits paid outpace revenue – in 2017, and the program’s assets will be exhausted in 2041, according to the Social Security trustees. Raising the retirement age and then indexing it to life expectancy could make the system sound “indefinitely,” Mr. Gramlich said.

Raising the retirement age would create hardships for older workers who may not be able to find good jobs and for laborers unable to work into old age, says William Novelli, chief executive of the Washington-based AARP.

“AARP members would hate it like poison,” Mr. Novelli said in an April 11 interview. Even so, raising the retirement age “needs to be discussed,” said Mr. Novelli, who has participated in White House talks over shoring up the system. President Bush says that all Social Security options except a tax-rate increase are on the table.

When Social Security was created in the mid-1930s, life expectancy was about 60 years at birth and 12 more years for those who made it to 60. A retirement age set at 65 meant a person’s benefits weren’t intended to last much more than a few years. Life expectancy in recent years has risen to 76 from birth, and those who reach 65 might expect to live, on average, another 18 years.

“The odds of raising the normal retirement age are pretty high,” said a senior fellow at the National Center for Policy Analysis, Bruce Bartlett. “It’s the one significant thing you can do to reduce the long-term cost that you might actually be able to do politically because it clearly doesn’t affect any current retirees or those nearing retirement.”

In a March poll by the Pew Center for the People and the Press, only 25% of respondents favored boosting the retirement age, making it the least favorite of five options that also included raising payroll tax rates, limiting benefits for the wealthy, reducing the rate of inflation-adjusted increases in benefits, and eliminating the $90,000 cap on income subject to payroll taxes.

Lost in the debate is the flip side of a retirement age increase: higher health care costs, which can drain funds from the Medicare side of the Social Security system. Some Democratic economists say that would defeat the arguments for raising the retirement age.

“Politically, it’s a nonstarter, and fiscally and economically it’s a nonstarter,” says Christian Weller, an economist at the Center for American Progress in Washington. “You’d be wading into a politically charged battle with very little economic payoff for the system.”