Social Security is not in the best financial shape. In the coming years, as baby boomers exit the workforce in droves, the program will see its payroll tax revenue shrink. That's a problem, since that's Social Security's primary means of funding.
Social Security can tap its trust funds in the coming years to make sure it can keep up with scheduled benefits as its payroll-tax revenue declines. But once those trust funds run dry, benefit cuts may be on the table.
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Lawmakers are trying to avoid that, though, since it would cause a major hardship for current and future beneficiaries alike. And they've proposed different solutions designed to help keep Social Security solvent.
One such solution is to push back full retirement age, or FRA, from 67 to 68 or 69 for younger workers. FRA is when Social Security recipients can claim their monthly benefits in full.
The idea of a postponed FRA may not sit well with a lot of people initially. But here's why it's not such a bad thing.
Motivation to keep working
Many seniors inevitably end up approaching retirement with limited savings. And that's a bad thing because retiring mostly on Social Security alone could make for a pretty cash-strapped existence.
The upside of postponing FRA beyond age 67 is that it might push more workers to extend their careers. And doing so might allow them to build more savings before tendering their resignations. Just as importantly, working a few extra years means getting to leave existing savings untapped for longer.
But it's not just financial benefits to be gleaned from working longer. There can also be social and mental health benefits.
Many seniors find retirement to be an isolating and, therefore, difficult period of life. And it can be very jarring to go from a full-time work schedule to no schedule at all. Working longer puts off that adjustment and gives those nearing retirement more opportunity to ease into that change.
For example, someone who can't afford to retire without Social Security might opt to work until age 69 instead of 67 if that's their new FRA. But they might also choose to scale down their hours during that time rather than go from a 40-hour workweek to no work at all. That phased transition could be a much better way to approach retirement.
A change that's by no means set in stone
Although lawmakers need to do something to address Social Security's impending financial shortfall, pushing back FRA isn't their only option. Lawmakers could instead raise the Social Security tax rate or impose taxes on higher incomes.
Right now, there's a wage cap that cuts off Social Security taxes at a certain income limit. Lawmakers could raise that cap or eliminate it altogether so that all wages, no matter how high, are taxed for Social Security purposes.
But postponing FRA could actually benefit workers, even if that idea might seem like it's apt to do the opposite at first. And for this reason, it's not such an outlandish proposal.
