There's arguably no program more important to senior citizens during retirement than Social Security. Though Medicare's importance is growing over time, no social program tops the guaranteed monthly payout that nearly all seniors receive from Social Security in retirement. And 62% of aged beneficiaries lean on this benefit to provide at least half of their monthly income.
However, the federal government through policy action can alter Social Security income. Some actions could raise additional revenue for the program, ultimately buoying or even lifting scheduled payouts. Meanwhile, others are aimed at cutting long-term program expenditures and, in many cases, reducing monthly and/or lifetime benefits.
Whether you realize it or not, there are eight ways the federal government could take this latter approach and cut your Social Security benefit.
1. Raise the full retirement age
One of the most commonly suggested solutions by Republicans for resolving Social Security's long-term (75-year) cash shortfall of $13.2 trillion, as estimated by the latest Trustees report, is to raise the full retirement age.
Full retirement age is the age at which eligible beneficiaries can receive their full retired worker benefit, as determined by their birth year. If you begin receiving your entitlement at any point prior to reaching your full retirement age, you'll be accepting a permanent reduction to your monthly payout. On the other hand, if you wait until after your full retirement age to claim benefits, you can actually receive in excess of 100% of your full monthly benefit.
The full retirement age has been gradually increasing at a much slower rate than longevity. We're living longer, and therefore today's seniors are able to receive a Social Security benefit for much longer than their parents or grandparents. But that's a problem, as it has put a strain on the program.
To resolve this, lawmakers could choose to gradually raise the full retirement age from its expected peak of 67 in 2022, for those born in or after 1960, to, say, 68, 69, or 70 years old. Afterward, retirees would either choose to accept a steeper discount in their monthly payout by claiming early, or they could wait longer to receive their full benefit. Either way, it results in a reduced lifetime Social Security benefit.
2. Link benefits to longevity
Another approach that's very similar to the idea of raising the full retirement age is to progressively link benefits to longevity.
What does that mean exactly? Rather than simply picking a number out of thin air and saying that by 2040 the full retirement age will be 69, lawmakers would index the full retirement age to U.S. life expectancies so that it changes each year to reflect increasing or decreasing longevity. The advantage here is that this method would eliminate the possibility of the life expectancy outrunning the increase in full retirement age, as we've seen for many decades now.
Additionally, linking benefits to longevity could also allow lawmakers to adjust when delayed-retirement credits max out, which is currently at age 70. Or, in other words, if retirees are willing to wait long enough, they could still earn in excess of 100% of their monthly payout, just as under the current system.
Ultimately, though, progressively linking benefits to longevity would reduce the length of time beneficiaries could collect a payout, thereby lowering their lifetime benefit.
3. Switch the inflationary tether to the Chained CPI
A sneaky way the government could choose to reduce Social Security benefits is by switching the tether that measures inflation and therefore determines the annual cost-of-living adjustments (COLA).
Since COLA was introduced in the mid-1970s, it's had the same inflationary measure: the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. Neither the Democrats nor Republicans particularly care for this inflationary measure since it reflects the spending habits of working-age urban and clerical workers and not of seniors, who comprise a majority of Social Security's beneficiaries.
For Republicans, the solution would be to the switch to the Chained CPI. If the name sounds familiar, it's because the Chained CPI is the same inflationary tether that was introduced with the passage of the Tax Cuts and Jobs Act last December. Though the Chained CPI and the CPI-W are very similar, there is one very big difference: The Chained CPI takes into account substitution bias.
Imagine you're walking down the meat aisle in the supermarket and notice that the price for ground beef has soared. Instead of paying the higher price, you trade down to similar but cheaper meats, such as pork and chicken. This is a perfect example of substitution bias. No other major inflationary index takes substitution bias into account, aside from the Chained CPI. And as a result, it tends to report inflationary increases that are lower than the CPI-W. If Social Security's COLA were tethered to the Chained CPI, it would almost assuredly mean smaller annual raises for beneficiaries.
4. Freeze the purchasing power of benefits for some, or all, beneficiaries
A fourth way the federal government could reduce Social Security benefits is by freezing the purchasing power of benefits for some, or all, beneficiaries.
In that approach, rather than continue giving eligible beneficiaries an annual raise (i.e., COLA) that's commensurate with the inflation measured by the CPI-W, Congress would simply vote not to pass along an annual COLA. If no raises were given, then benefits would remain frozen from one year to the next, thereby losing purchasing power to the rising price of goods and services.
This idea has been loosely tossed around on Capitol Hill in two forms. First, there's the idea of freezing benefits for well-to-do individuals who are far less likely to be reliant on Social Security income. The second idea was simply to apply it to all Social Security beneficiaries. Both methods, as noted, would reduce the purchasing power of Social Security income over time, but also reduce long-term expenditures for Social Security.
5. Means-test for benefits
One idea that's made the rounds on Capitol Hill with both Democrats and Republicans is means-testing for benefits. Means-testing is simply a way of saying that benefits would begin to phase out, or be eliminated completely, over a certain annual income level.
During the early stages of presidential campaigning in 2015, former Republican New Jersey Governor Chris Christie suggested implementing means-testing as a way to reduce Social Security's long-term expenditures. Specifically, he suggested a system whereby reduced payouts would go into effect once earned income crossed the $80,000 threshold, and benefits would be phased out completely for retirees with incomes north of $200,000. The thinking here was that the wealthy were far less likely to be reliant on Social Security income if they're bringing in $80,000 or over $200,000 a year in income, so why not reduce or eliminate monthly payouts entirely.
During his presidential campaign, Donald Trump also touched on the subject, saying that he'd forgo taking Social Security benefits, and also implied that other wealthy Americans should do the same. Though means-testing would affect only a relatively small percentage of beneficiaries, it nonetheless is a way to reduce payouts.
6. Fully or partially privatize the program
The sixth way the government could reduce Social Security benefits is by partially or fully privatizing the program. This is a solution that former President George W. Bush pushed for in the mid-2000s, and that President Trump and Vice President Mike Pence once supported.
The idea behind privatization is simple: A portion of an individual's retirement benefits would be placed into a retirement account that they could invest as they see fit. This account may have limited investment options, similar to a 401(k) that offers mutual funds, or it could have a wide gamut of options with few restrictions. In this system, proponents argue, workers would have an opportunity to grow their benefit at a faster rate than the 2.9% yield the Social Security program is currently receiving on its nearly $2.9 trillion in asset reserves.
Though privatization would give Americans an opportunity to do more with their retirement benefit, it has two important implications. First, Americans tend to score poorly when it comes to financial literacy, so there's a real possibility some could wind up losing money, putting themselves in worse shape come retirement. And second, it's really a way of reducing the federal government's responsibility of providing benefits to retired workers later in life.
7. Use Social Security as a future-loan program
Social Security benefits could also be used as a loan program today that could reduce payouts in the future, which is the cornerstone of a recently introduced Republican plan.
The Economic Security for New Parents Act, introduced roughly a month ago by Marco Rubio, a senator from Florida, would allow parents the option of using future Social Security benefits to take extended leave following the birth of a child. In theory, this would take the burden of paying for leave off of employers, as well as provide a new source of income for parents. In return, parents using this "loan" would be required to wait longer to receive their retired worker benefit when they hit their claiming age.
Among the numerous issues with this bill, one of the biggest problems is that it would reduce the lifetime benefits of those who took advantage of extended leave. An analysis from the Urban Institute, a think tank, found that a single 12-week leave could reduce lifetime benefits by 3%. For a family with four kids, four 12-week absences would reduce lifetime payouts by a whopping 10%.
8. Flat-out cut benefits to preserve long-term payouts
Last but not least, lawmakers could simply amend Social Security's payout schedule and reduce benefits across the board. Though this is an extremely unpopular option to resolve Social Security's imminent cash crunch, it's nonetheless an option that is on the table.
According to the Social Security Board of Trustees' 2018 report, the program will begin burning through its $2.89 trillion in asset reserves this year, with total expenditures slightly outpacing expected revenue. However, in 2020 and beyond, this net cash outflow will really accelerate. By 2034, Social Security excess cash is expected to be completely exhausted.
The good news: Social Security's noninterest income -- the 12.4% payroll tax on earned income and the taxation of benefits -- ensures that it won't go bankrupt, and that payouts can continue to be made ad infinitum. The downside is that the current payout schedule is proving to be unsustainable. If Congress doesn't figure out a way to raise additional revenue or cut expenditures in time, an across-the-board benefits cut of up to 21% may be needed by 2034.
Though no one wants to see their Social Security benefit cut, the federal government sure does have a plethora of options to do just that.
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