This has been a big week for Social Security beneficiaries. Yesterday, nearly 64 million monthly benefit recipients found out exactly how much of a "raise" they'll be getting in 2020. And while it's nowhere near as robust as the cost-of-living adjustment (COLA) that was passed along this year, it's far and away better than the 0% COLA passed along in 2010, 2011, and 2016, or the minuscule 0.3% COLA in 2017.
However, Social Security's COLA reveal also means it's time to look forward to a host of changes in the program for the following year. For example, the rich will have to hand over a bit more in payroll tax in 2020 than they did in 2019, and the long-term disabled (along with the blind) will be able to earn more each month before their disability checks would be stopped.
Changes to the full retirement age are rare
But the most notable change of all might just be the increase in the full retirement age by another two months to 66 years and eight months for those born in 1958. The full retirement age (also known as "normal retirement age" by the Social Security Administration) is the age at which you become eligible to receive 100% of your monthly benefit, as determined by your birth year.
When Social Security was signed into law back in August 1935, the full retirement age was set at 65. It would remain at this level through the year 1999. Mind you, the system didn't work back then as it does today. This is to say that beneficiaries didn't have the option of choosing to claim earlier than age 65. The early claiming option that allowed workers to begin taking a reduced payout as early as age 62 was signed into law in 1961 by President John F. Kennedy. Thus, up until 1961, workers had no choice but to wait until age 65 to receive their payout.
Since 2000, the full retirement age has increased nine times, as part of the Reagan administration overhaul passed in 1983. Each of these increases to the full retirement age has been in two-month increments. Between 2000 and 2005, the full retirement age for persons between 1938 and 1943 increased by two months annually, ultimately rising from 65 to 66. Then, after a more-than-one-decade lull when the full retirement age stood at 66, it began increasing again in 2017. It'll peak at age 67 in 2022 for those born in 1960 and later.
Next year, when the program's full retirement age climbs to 66 years and eight months, it'll mark just the 10th time in 85 years that it's increased.
Here's why the full retirement age is an under-the-radar powder keg for Social Security
This may not seem like a big deal, but the full retirement age is arguably one of the biggest problems with the Social Security program.
Back in 1940, when the very first benefit checks were doled out to eligible workers, the average life expectancy for a baby born in the U.S. was 60.8 years for men and 65.2 years for women. As of 2017, it had risen to 78.6 years for the average baby. Put another way, in the time it's taken for Social Security's full retirement age to rise by less than two years, the average life expectancy has increased by approximately 15 years. There are some pretty major implications for this disparity.
When the program was signed into law, it was designed with the idea that it would provide a financial foundation for those workers who could no longer provide for themselves. But the expectation is that these payouts would continue for years, not decades. Today, the Social Security Administration finds that the average 65-year-old will live another 20 years. That's potentially two or more decades of payouts, and it's clearly becoming a burden on the program.
Rising income inequality has also led to the exploitation of this disparity between the full retirement age and longevity. Since the well-to-do have little or no financial constraints when it comes to receiving preventative care, medical care, or prescription medicine, they're living substantially longer than the low-income workers that Social Security was truly designed to protect. Not only does this mean that wealthier individuals are, on average, receiving a Social Security payout for decades at a time, but this payout is considerably higher than the average monthly benefit paid to retired workers.
The full retirement age needs attention, but is unlikely to be addressed
So, why hasn't the full retirement age been increased to reflect rising longevity and ease some of the burden on the Social Security program? The issue is that increasing the full retirement age is akin to cutting benefits, and that's a big no-no for a lot of politicians on Capitol Hill.
Since your full retirement age represents the point at which you become eligible to receive 100% of your monthly payout, gradually raising it over a period of years or decades means reducing the lifetime earning potential of future generations of workers.
For example, one of the core solutions to Social Security's imminent cash shortfall offered by Republicans is the idea of gradually increasing the full retirement age from 67 to as high as 70. While sparing current and near-term retirees, such a move would likely require millennials and generation Z to either wait longer to collect their full payout or to accept an even steeper reduction by taking their benefit early. Thus, future generations of retired workers would have fewer years to collect if they wait, or would receive even less each month if claiming early. No matter their choice, the amount paid out by the program would be less than under the current model. It's a cut to long-term benefits.
Democrats in Washington, D.C. simply won't support any legislation that reduces benefits, either on an up-front or long-term basis. This is why legislation that increases the full retirement age, or even offers to index it to longevity, is unlikely to be addressed anytime soon.