Donald Trump's controversial statements may get the press, but Ted Cruz plans for Social Security are equally contentious. In a bid to ensure the long-term viability of the long-standing retirement safety net, the Texas' Senator has laid out plans to cut Social Security eligibility and limit benefits paid to recipients. Can Cruz's Social Security plans overcome retiree pushback? Read on to find out the details of his Social SEcurity strategy.
First, a bit of background
If you're older and approaching retirement, you undoubtedly know what Social Security is, but you might not understand what it isn't.
Social Security is a government run retirement program designed to provide retirement income to seniors once they reach a minimum of 62 years old. Retirement income paid out to Social Security recipients is funded via employee and employer contributions currently being made by and for about 163 million American workers.
However, Social Security was never intended to be the sole source of retirement income for Americans because it only replaces about 40% of a retiree's pre-retirement wages. For example, the average retired worker's Social Security income is $1,341 or about $16,000 annually in 2016.
"What we're seeing politicians do...is reckless and irresponsible"-Ted Cruz
According to Cruz and others, Social Security's long term survival is at risk. Social Security is a pay-as-you-go system, meaning that the 59 million or so Americans who receive Social Security income today get that income from the Social Security taxes paid by current workers.
In this way, Social Security differs dramatically from other retirement programs, such as pensions and 401(k) plans. In those plans, money is set aside by an employee or employer in a segregated account for the sole benefit of the employee or the employee's family.
Because Social Security is funded by current workers, the composition of the American population is critical to its long term survival.
In periods where the number of young workers is rising more quickly than the number of people who are retiring, taxes can cover Social Security payments. However, the opposite is also true, and that means that aging baby boomers who are living longer are putting Social Security's future on shaky footing.
In 1970, only 9.8% of the U.S. population was age 65 and older, but that figure increased to 13% in 2010 and it's expected to eclipse 20% in 2030.
Since a greater proportion of the American population is getting older, it's not surprising that people, including Cruz, worry that Social Security won't be able to maintain business-as-usual without significant change. So far, such change hasn't happened and Cruz and others largely blame that on Washington politicians and lobbyists.
Presenting a plan
Given that backdrop, Cruz's proposed changes to Social Security don't seem nearly as controversial as they might otherwise appear to be.
The Senator's proposals include:
- Gradually increasing the retirement age;
- Changing benefit increases to match inflation; and
- Creating personal accounts using a portion of a person's Social Security benefit.
Cruz precedes a discussion of these proposals by promising that these changes will not impact current retirees or people who are close to retirement. However, he also says that people of his generation (he's 44 years old) ought to be willing to accept them to guarantee the program's survival.
In Cruz's view, the solution to Social Security's solvency isn't higher taxes, but lower expenditures.
Currently, Social Security's full retirement age -- the age at which a person qualifies for their full retirement benefit -- is either 66 years or 67, depending on the year in which a person was born, and the earliest age that a retired worker can opt into Social Security is 62.
Obviously, increasing the full retirement age and the earliest age at which a person can file for Social Security would reduce the number of Social Security recipients and thus, lower Social Security spending, but it remains unclear what the "magic" full retirement age should be, and whether an increase in age today would lead to additional increases in the future.
Cruz also wants to change how benefit increases are calculated by shifting from traditional CPI to another inflation calculation, such as chained-CPI, which takes into account the likelihood of changing consumer spending patterns as prices increase.
A similar proposal (that is, chained-CPI) by President Obama fell on deaf ears in 2014, but Obama's proposal offers up insight into the potential impact of making such a change. Between 1999 and 2011, chained-CPI increased by about 0.3% less than CPI annually and according to the CBO, switching to chained-CPI would result in retired workers receiving $30 less per month in benefits by 2023 versus traditional CPI.
Finally, Cruz also proposes to allow some amount of a person's tax payments to be put in a personal account that a person can control and eventually pass along to their heirs.
A similar approach was recommended by George W. Bush during his Presidency, but failed to win enough support to make its way to his desk. Proponents contend that establishing personal accounts like these would allow recipients to invest more aggressively and therefore, allow them an opportunity for higher returns. Opponents worry that market volatility could lead to the plan backfiring and thus, result in more seniors falling into poverty.
Here's the bottom line
A survey by Gallup last fall shows that about half of working Americans doubt they'll ever receive Social Security income and that concern is fueled by projections that Social Security's ability to pay full benefits will cease in 2034.
That's a scary revelation considering that the Social Security Administration estimates that 53% of elderly married couples rely on Social Security payments for at least half of their income and 22% of elderly married couples count on it for at least 90% of their income. Given those statistics, its clear that reform should be on the table; it's just not clear what that reform should be. But, there is one thing that's clear: Social Security remains an important source of income for retirees, and that's why you shouldn't neglect...