President-elect Donald Trump took a pragmatic approach toward Social Security during his campaign, assuring voters that he would save Social Security without making any cuts. Yet even before Trump has taken office, Republicans on Capitol Hill have challenged that campaign promise. In particular, one congressional representative's proposal would raise the full retirement age for younger Americans from 67 to 69, leading to indirect benefit cuts that would dramatically reduce what those workers would receive from Social Security in retirement.
With his own party going against his stated position on Social Security, incoming President Trump will face a big question: Would he veto Republican legislation cutting Social Security if it got to his desk?
The Social Security Reform Act of 2016
Last month, congressional representative Sam Johnson (R-Tex.) introduced what he called the Social Security Reform Act of 2016. Johnson holds an influential position in Congress, serving as chair of the Social Security subcommittee for the powerful House Ways and Means Committee. The provisions of the proposal include changes to benefit calculations, adjustments to the way cost-of-living increases are determined, and some means-testing benefit reductions for higher-income families.
One key aspect of the proposal would be to raise the full retirement age to 69. To achieve this, the proposal would extend and accelerate the currently ongoing increase in the full retirement age from 66 to 67. Under current law, the full retirement age is 66 and two months for those who turn 62 in 2017, and it will rise by two months per year for those turning 62 in 2018 and later until reaching 67 in 2022. Johnson's proposal would further boost the retirement age by three months per year starting in 2023, with the eventual result being that those who turn 62 in 2030 or later would have a full retirement age of 69.
Why a higher full retirement age is a stealth Social Security cut
Unfortunately, what many people don't realize is that the impact of a higher full retirement age is a sizable yet hidden reduction to Social Security benefits. The reason has to do with the way that benefits are calculated.
Under the proposal, Americans would still be allowed to take early Social Security benefits starting at age 62. However, because the full retirement age would be higher, those who file for benefits early would see their benefits reduced by a greater percentage than current retirees. For instance, those who turned 62 last year have a full retirement age of 66, so their benefit reduction for taking benefits at age 62 was 25%. Meanwhile, those who turn 62 in 2022 have a full retirement age of 67. The reduction in their benefits if they claim at 62 will be 30%, rather than 25%. Based on the typical retirement monthly benefit, such a reduction could easily cut recipients' monthly checks by $50 to $100.
If the full retirement age is raised to 69, then claiming Social Security early will have an even bigger impact. Based on the current formula, if your full retirement age were 69 and you took benefits at age 62, then your benefits would be reduced by 40%. That additional cut of 10 to 15 percentage points would make a huge difference.
Those who wait past their full retirement age would also get a smaller benefit boost than they would otherwise. The proposal extends delayed-retirement benefits through age 72, but one would have to miss out on two to three full years of benefits in order to reach the same maximum amount they could achieve under current law.
Is a Trump veto coming?
Predictably, lawmakers who opposed the president-elect are already calling for him to oppose Johnson's bill. Former presidential candidate Sen. Bernie Sanders (I-Vt.) demanded in the opening days of the new congressional session that Trump threaten to veto any cuts to Social Security and other programs that the Republican Congress passes.
That said, one source of frustration among many congressional Republicans was the president-elect's unwillingness to consider cuts to popular programs. As members of Congress try to determine what their relationship with the White House will look like, there's still plenty of uncertainty about how much Trump's campaign stances may change when he assumes the presidency.
President-elect Donald Trump can expect to face political pressure from all sides once he takes office, and Social Security will be a key issue. Whether he will veto Social Security reform or back down from his campaign promises will make a huge difference in how Americans of all political parties view the incoming president's administration.
The Motley Fool has a disclosure policy.