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This New Approach to Social Security's Full Retirement Age Would Eliminate 83% of Its Cash Shortfall

By Sean Williams - Apr 10, 2017 at 10:10AM

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Indexing the full retirement age to longevity would have a profoundly positive impact on Social Security.

Social Security is, for millions of Americans, a financial lifeline during retirement. The average retired worker may only be receiving $1,364 per month as of Feb. 2017, or a little bit more than $16,300 annually, from Social Security, but that still amounts to more than half of the annual income collected by 61% of retired workers, according to the Social Security Administration.

Yet this critical financial lifeline is in danger of failing current and future retirees. Estimates from the Board of Trustees 2016 report suggest that the Trust will have depleted its more than $2.8 trillion in excess cash by the year 2034. While the program will continue to pay benefits to retirees, it may be at a substantially reduced rate (up to 21% per the report). Considering that so many senior citizens rely on their benefits to make ends meet, this is a scary proposition.

An old man pondering whether he'll receive enough Social Security income to meet his expenses.

Image source: Getty Images.

The reality of the matter is that Social Security needs some T.L.C., and lawmakers in Washington are the only people who can provide it. Ironically, though, solutions certainly aren't the problem here. There have been more than a dozen different proposals put on the table for lawmakers to discuss from both parties. The issue appears to be that Democrats and Republicans both have workable ways to fix Social Security, and neither wants to back down from their proposal.

This bipartisan Social Security fix probably snuck under your radar

What we rarely see from Capitol Hill is a proposal that blends Democrat and Republican ideals into a single bill. Last year, we actually did see that happen with the introduction of the Save Our Social Security Act of 2016 (also known as the S.O.S. Act of 2016). The bill was introduced in July 2016 with the backing of five Republicans and one Democrat in the House.

Here were some of the basic provisions of the S.O.S. Act of 2016:

  • It increased the normal retirement age (also known as the full retirement age) by two months per year between 2022 and 2034. Thereafter, it would index the normal retirement age to life expectancy.
  • The Social Security program would be allowed to tax 90% of covered earnings.
  • Social Security would ditch the Consumer Price Index for Urban Wage Earners and Clerical Workers and use the Chained CPI, which factors in substitution, instead.
  • More years than just your top-35 earning years would be used in calculating your benefit.
  • It would raise the annual benefits for persons with more than 20 years of coverage by $1,000 a year. This amount would keep pace with average wage growth thereafter.
  • A special minimum benefit would be set for workers with 20 years of coverage so they made at least the poverty rate.
A Social Security card wedged between cash bills.

Image source: Getty Images.

As you can see, there are a number of mixed elements here between the Republican and Democratic parties. Republicans typically favor raising the full retirement age (FRA) and using the Chained CPI, while Democrats strongly believe in taxing wealthier individuals and increasing the minimum benefits of older Americans and/or low-income seniors. This bill was one of the first attempts at true bipartisan support we've seen in a long time.

This unique way of adjusting FRAs eliminates most of Social Security's cash shortfall

However, the S.O.S. Act of 2016 may be best remembered as providing a unique solution to Social Security's full retirement age that would eliminate a whopping 83% of the program's budgetary shortfall, according to estimates from Social Security's Office of the Chief Actuary. The report suggests that the S.O.S. Act's treatment of the full retirement age would eliminate 2.21% of the long-term actuarial deficit. In 2016, the actuarial deficit was 2.66%. For those interested, the entire bill was found to have preserved current payments as they are over the next 75 years.

What's intriguing about the S.O.S Act's treatment of the full retirement age is that it remains exceptionally fluid. Between 1983 and 2022, Social Security's FRA will have risen by just two years, from age 65 to age 67 for people born in 1960 or later. The S.O.S. Act would continue raising the FRA by two months per year between 2022 and 2034 until it hits age 69 in 2034. At this point, the FRA would be indexed to longevity, which the Office of the Chief Actuary estimates would mean a one month increase in FRA for every two years through 2089. In other words, it would more accurately reflect rising life expectancies.

Social Security cards sitting next to cash and a benefit table, representing the importance of your claiming decision.

Image source: Getty Images.

At the same time, the maximum age for delayed retirement credits would increase in step with the full retirement age, keeping a three-year gap in place. For instance, by 2022 the FRA will be 67 years, and the maximum delayed retirement credit age will be 70 (the age at which retirement benefits stop accruing for those who've chosen to wait). Under the S.O.S. Act, an FRA of 69 would push delayed retirement credits out to age 72. This would allow benefits for those who choose to wait to accrue by roughly 8% per year until age 72.

This unique way of factoring in lengthening life expectancies while also encouraging seniors to wait to claim is a surprisingly smart way to eliminate a significant chunk of Social Security's projected cash shortfall.

Change could still be a-ways off

But we also have to face the fact that the S.O.S Act didn't really get anywhere in Congress last summer, and it's unlikely to find any traction with Donald Trump in the Oval Office, as he has pledged not to touch Social Security.

Instead of direct changes to Social Security, Trump wants to focus on increasing economic growth, which would have the effect of growing wages and increasing the payroll tax revenue collected by the Social Security program. Trump's plan involves a comprehensive reform of individual and corporate income taxes, the promotion of domestic energy production, a large-scale, decade-long infrastructure project, healthcare reform, and the de-regulation of a number of industries. Considering how tough reforming healthcare has been thus far, this is going to be no easy task for the new president; nor is it going to settle the nerves of worried seniors and pre-retirees.

Congress is known for taking things down to the wire when it comes to passing important legislation, and Social Security may prove no different.

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