Social Security is instrumental in keeping millions of retired workers afloat. But the program is facing a funding shortfall that, if left unaddressed, could result in a major reduction in retirement benefits across the board.
If that cut in benefits were to actually happen, a frightening number of seniors would be pushed dangerously close to the poverty line, if not below it, while future retirees would risk a similar fate. As such, lawmakers are heavily invested in salvaging Social Security and avoiding any sort of universal slashing of benefits.
But one potential solution to Social Security's financial woes has some advocacy groups up in arms. Utah Senator Mitt Romney recently introduced a proposal that involves one major change to Social Security as we currently know it: raising the full retirement age, otherwise known as the age at which seniors can collect their monthly benefits in full.
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It wouldn't be the first time that's happened. Back in 1983, legislation pushed Social Security's former full retirement age of 65 up to a range of 66 through 67, depending on year of birth. Seniors, meanwhile, can take benefits as early as age 62, but for each month they're claimed prior to full retirement age, they're reduced on a lifelong basis. But while proponents of raising Social Security's full retirement age argue that it's a reasonable thing to do given increased life expectancy, critics argue that it's not only unfair to many seniors, but also, won't actually solve the problem at hand.
Why raising full retirement age may not work
According to the latest Trustees Report, Social Security is looking at a revenue shortfall that could result in a reduction in benefits as early as 2035. That's a pretty near-term problem. Raising full retirement age, meanwhile, is more of a gradual solution, and so there's a clear misalignment in this regard.
If the goal is to prevent a reduction in benefits for current and near-retirees, a solution like raising the payroll tax cap would possibly be more effective. Currently, workers only pay Social Security taxes on their first $132,900 of income. In 2020, that threshold is increasing to $137,700. But raising the wage cap even higher would result in an immediate uptick in revenue for Social Security, thereby potentially trumping the efficacy of a new full retirement age. (Of course, higher earners aren't a fan of this solution. Go figure.)
Furthermore, though it's true that life expectancy has increased on a nationwide level, it's remained stagnant for lower-income groups over the past two decades. As such, it's hardly the fairest solution.
Of course, it's too soon to tell how Social Security's funding crisis will get resolved. The best thing current retirees can do in light of it is attempt to live more frugally, bank some additional savings, and look into part-time work if that's feasible. Future retirees, meanwhile, can similarly cut back on spending to boost their nest eggs and look at extending their careers to not only leave their existing savings untouched for longer, but also, to open up the option of delaying their Social Security claims. For each year benefits are delayed past full retirement age, they increase by 8%, up until age 70. And that's a good way to boost a major, albeit precarious, income stream.
