Social Security is the most influential social program the federal government has ever offered. Today, it is the primary source of income for Americans aged 65 and older. With baby boomers retiring in droves, it will be even more vital in the coming decades.
Since George W. Bush suggested a semi-privatization of Social Security funds over a decade ago -- and got thoroughly lambasted for it -- politicians have generally shied away from commenting on the program. But with the ratio of workers to retirees shrinking and the program's Trust Fund set to run out of money in the 2030s, the next Congress may have no choice but to act.
Currently, Republicans hold 57% of the seats in the House of Representatives and 54% of the seats in the Senate. They may retain this control in November's general elections, so it's worth investigating how a Republican Congress could change Social Security.
In order to help evaluate the effect of any changes, I let the good folks at the American Academy of Actuaries (AAA) do the heavy mental lifting.
Would gradually increasing retirement age fix Social Security?
Already, Social Security's full retirement age is scheduled to creep up. Back in 1983, Congress passed a law calling for a transition from 66 to 67 years old. This will start in 2021 and end in 2027, with the full retirement age increasing by 2 months every year in between.
As life expectancies and the number of senior citizens continuing to work into their 60s have increased, many Republicans have advocated for increasing the age for full Social Security benefits. The AAA tested three different scenarios to see what percentage of Social Security's shortfall could be resolved:
- Starting in 2027, increase the full retirement age by one month every two years, until it reaches 68.
- Starting in 2027, increase the full retirement age by two months every year, until it reaches 68.
- Starting in 2027, increase the full retirement age by two months every year, until it reaches 69 -- and then increase it by one month every two years into perpetuity.
Here's how effective each of the three plans would be.
Appealing as the solution is, it's clear that simply raising the full retirement age alone won't solve Social Security's problems. Furthermore, even though the third plan offers more relief, it would be a very hard sell, as it calls for the retirement age to continue increasing (in theory) forever.
Would decreasing cost-of-living adjustments (COLAs) fix Social Security?
During the third quarter of every year, the Bureau of Labor Statistics (BLS) calculates the Cost of Living Index for Urban Wage Earners and Clerical Workers (CPI-W). The BLS' results are then used to index any changes to a retiree's monthly Social Security check. In 2015, the CPI-W didn't increase, so there were no COLA increases for 2016 recipients.
The AAA considered four different scenarios for reducing COLAs in the future. It's important to note that while all four options represent relatively small changes, they would compound powerfully over time.
While it's clear that there's more leverage here, it's unlikely that a full 1% decrease could ever reach its full potential. Indeed, Congress may be able to pass such legislation. But over time, the bills that senior citizens have to pay would rise at a faster rate than their Social Security benefits, and they would begin to feel the pain. This could easily lead to a revision of the policy. Small decreases, however, may be palatable in the short and long term.
Lowering benefits for high-earning retirees
Finally, Republicans have openly pondered benefit reductions for high-earning retirees. While this might have been blasphemy in previous generations, as these reductions hit those who contributed the most to the system, several former candidates for the Republican nomination -- Chris Christie, Jeb Bush, and Marco Rubio -- have supported various forms of this idea.
The AAA considered just two general plans: a benefit reduction for the top 40% of wage earners and a benefit reduction for the top 50% of wage earners. In essence, what this type of plan aims to do is keep benefits exactly the same for the bottom 60% and 50% of wage earners, respectively.
Meanwhile, those who consistently earn above the maximum taxable by Social Security would see their benefits rise only in relation to price indexing -- rather than the wage-indexed formulas used now, which rise faster. Essentially, these high-earners would retain the same purchasing power, but their benefit growth would be slower. Those who fall between the bottom 50% (or 60%) and the highest earners would see a blend of wage- and price-indexing.
The biggest problem with the plans studied by the AAA is that they include such a large portion of retirees. As it stands, over half of retirees count on Social Security for at least 50% of their income. That means that even among the top half of earners, Social Security is important -- and reducing benefits would have a greater impact that one might believe.
Is there any plan Republicans could offer that would work?
If Social Security reform were to pass both houses of Congress, then there would likely be a combination of Republican and Democratic ideas. As far as those discussed above, though, a combination of raising the retirement age to 68 by two months per year, decreasing COLAs by 0.5% per year, and reducing benefits for the top 40% of earners would address 91% of Social Security's shortfall.
Whether that will ever actually happen is anybody's guess. At the end of the day, no one cares about your financial situation in retirement as much as you. That's why you need to do everything you can today to make sure you're in a comfortable position when your golden years arrive.