For many retired workers, Social Security is viewed as a vital source of monthly income. A majority of today’s retirees rely on Social Security to provide at least half of their monthly income, while a Gallup poll finds that greater than 8 in 10 baby boomers plan to rely on Social Security income to some degree when they eventually retire.
Congress has a problem on its hands
However, Social Security isn’t in the best shape. According to the Social Security Board of Trustees’ annual report, the program is on track to exhaust its more than $2.8 trillion in spare cash by the year 2034. The rapid decline in the Trust’s spare cash balance is being caused by the ongoing retirement of baby boomers from the workforce, which is weighing down the worker-to-beneficiary ratio, and the relatively steady lengthening of life expectancies, which allows seniors to draw payments from the Trust for an extended period of time. If Congress doesn’t find a way to resolve the current budgetary shortfall in Social Security, an across-the-board cut in benefits of up to 21% may be needed in less than two decades. That’s a scary though for current retirees, as well as those who’ll soon retire.
The interesting thing is that Social Security solutions are aplenty on Capitol Hill. More than a dozen Social Security fixes have been floated around in Congress, yet neither party can come to a resolution on how best to protect the benefits of current and future generations.
The American public, though, has been pretty clear about its intentions. An informal reader poll from The Washington Post in 2014 found that an overwhelming majority of readers supported the idea of raising the payroll tax earnings cap on wealthier Americans. All U.S. workers pay a 12.4% payroll tax (which is often split down the middle with your employer, with each paying 6.2%) on wages between $1 and $127,200, as of 2017. This means any wages earned above $127,200 are free and clear of the payroll tax. The American public would like to see this figure lifted higher so that richer Americans pay a greater portion of their wages into the program. Since raising the payroll tax earnings cap would only affect a relatively small percentage of the population, it’s among the most popular solutions.
This shocking Social Security fix is gaining steam with the public
Surprisingly, though, a new study from the Public Consultation School of Public Policy at the University of Maryland finds another solution gaining steam.
Of the nearly 8,700 registered voters who took part in the “Voice of the People” survey, a shocking 79% supported the idea of raising the full retirement age from 67, which is set to be hit in 2022 for those born in 1960 and after, to age 68. The survey estimates that moving the full retirement age to 68 would eliminate about 15% of the program’s budgetary shortfall. Surprisingly, 78% of Democrats, 74% of Independents, and 81% of Republicans supported the idea in the survey. Republicans have long favored the idea of raising the full retirement age, but it’s an idea that’s often strongly opposed by Democrats.
A person’s full retirement age is determined by their birth year, and is the age at which they can claim 100% of their due benefits from Social Security. Retiring any earlier than your full retirement age means accepting a reduction in your monthly payout. Conversely, waiting until age 70, the last point at which benefits accrue (your benefits grow by approximately 8% for each year that you don’t file for benefits between ages 62 and 70), can net you a payout that’s higher than what you’d receive at your full retirement age.
The Social Security retirement benefit schedule for people born between 1943 and 1954. Chart by author. Data source: Social Security Administration.
For persons born between 1943 and 1954, the full retirement age was a tidy 66 years, right in between the traditional Social Security claiming ages of 62 and 70. Claiming at age 62 netted a monthly payment that was just 75% the total of your full retirement age benefit, while claiming at age 70 produced a monthly payout of 132% of your full retirement benefit.
Adjusting the scale to a full retirement age of 68 means everyone born after 1960 could potentially be facing a cut in benefits (everything would depend on the birth year Congress chooses to implement a full retirement age of 68). Waiting until age 70 would reduce your monthly take-home maximum from 132% to 116%, while claiming at age 62 would mean a greater than 30% reduction from your full retirement age benefit at age 68. From top to bottom, all future retirees would face benefits cuts.
Would it work?
Increasing the full retirement age certainly has its pluses and minuses.
The obvious benefit is that it would probably encourage healthy seniors to remain in the workforce for a longer period of time. Staying in the workforce means fewer years that retirees are receiving payments from Social Security, and it would also mean additional years of payroll tax revenue collection for the program.
You could also argue that the prospect of lower future payouts would encourage American workers to get more serious about saving for their future rather than relying on Social Security income to fill the gap when they retire (which is really how it should be in the first place).
Raising the full retirement age also relieves some of the stress of finding new revenue sources. According to the Trustees Report, a 2.66% payroll tax increase could eliminate the entirety of the shortfall through 2090, but it could prove tough to pass along an immediate tax hike of this magnitude, even if it would be just 1.33% for most workers since their employers would be responsible for half of the increase.
However, raising the full retirement age would be crippling for lower-income Americans, as well as those who aren’t in the best of health. Some people have little choice when it comes to filing for benefits at age 62, and moving the full retirement age higher means dooming these lower-income folks to accepting a considerably reduced payout that could leave them below the poverty level. Adjusting Social Security’s minimum benefit level higher could fix that problem, but it would also work against curbing the budgetary shortfall that lawmakers are trying to fix.
In theory, raising the full retirement age helps, but it’s not a solution by itself. I’ve long personally believed that a solution to maintain Social Security for generations to come is going to involve both tax increases and benefit cuts. It remains to be seen where Congress navigates next in its efforts to fix Social Security, but there’s certainly no shortage of ideas.
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