Social Security isn't just an issue that garners a lot of attention among seniors and pre-retirees -- it's arguably the most important issue that aging Americans face.
Social Security takes center stage
Come retirement, the Social Security program is designed to replace about 40% of a workers' income. In reality, though, nearly half of all unmarried elderly beneficiaries get 90% of more of their income from Social Security. The thought of tinkering with benefits is equally worrisome for baby boomers nearing or just entering retirement. Many were clobbered by the Great Recession, and a good chunk could be entering retirement with an inadequate amount of savings.
The Social Security program, however, isn't in great shape. The Old-Age, Survivors and Disability Insurance Trust, or collectively the OASDI, is slated to burn through its remaining cash reserves by 2033. If Congress can't come to a long-term solution that involves raising additional revenue and/or cutting expenses, benefits for eligible beneficiaries will be cut by 23%. That's a big problem, and it has seniors and pre-retirees concerned.
The root of the problem stems from two major demographic shifts. First, we're living longer than ever. A long life expectancy is great news for everyone, except the Social Security Administration, which has to pay out benefits for a longer period of time. Also, baby boomers are retiring in greater numbers, pushing the worker-to-beneficiary ratio lower. By 2033, the outflow of cash from the OASDI over what's being brought in via the payroll tax will exhaust its cash reserves.
How do we fix this? According to Republican presidential candidate Chris Christie, we need to make some pretty radical reforms to the entitlement program.
Are you ready to kiss 10% of your Social Security benefits goodbye?
Christie's recommendation to fix Social Security, like many before it, focuses on the coming generations to receive Social Security benefits and not on current retirees. Thus, if you're already receiving benefits, you can breathe a bit easier.
Christie's plan of attack is twofold. First, Christie wants to reduce entitlements for upper-income earners. He called for reduced benefits for people earning in excess of $80,000 per year and suggested eliminating Social Security payments entirely for individuals making more than $200,000 per year. But the more radical plan isn't the proposed means-testing of Social Security -- it's raising the retirement age on top and bottom.
Per Christie, he'd like to see the full retirement age moved from age 67, which is where it currently stands for those born after 1960, to 69. More interestingly, he also wants to enact a raise to the minimum age at which retirees can claim benefits from age 62 to age 64. Since the average American has a life expectancy of 21 years by age 60, Christie's plan calls for a lifetime Social Security benefits cut of around 10%. Christie's plan would see the retirement age on top and bottom increase gradually by two months per year until they reach their desired target, so we'd be looking at 12 years of retirement age increases.
Would Christie's proposal work?
There are arguably about a dozen different ways that Social Security can be "fixed" to ensure its long-term survival, but not every fix solves the entire budget shortfall or makes everyone happy.
Christie's proposal cuts lifetime benefits payouts by about 10%, potentially saving the OASDI from having to cut benefits by 2033 (although specific savings figures from Christie haven't been provided yet). It may also coerce pre-retirees and Generation X to work longer, which makes sense given that we're living longer than ever. It would also allow workers the opportunity to save more of their income prior to retirement, and it would generate more payroll tax revenue for the OASDI. Whether this extra payroll tax revenue and lowered benefits bridges the current shortfall is still anyone's guess.
But Christie's proposal also has adverse effects. It turns out that raising the retirement age could be very bad news for the nation's poorest citizens who rely on Social Security income in their golden years.
On average, the SSA's data shows that Social Security benefits make up 55% of the income of low-income retirees. Although the lifetime monthly payments are lower the earlier you file, lower-income individuals sometimes have no choice but to file as soon as possible. Health problems, inability to find a job (it's a lot tougher for seniors to find a well-paying job in today's jobs market), or the need for income can all impact their decision to file as early as possible. Raising the minimum retirement age could also result in a situation known as "job lock" whereby workers remain stuck in their job (whether they like it or not) because they simply can't afford to leave without guaranteed Social Security income. Pushing this date off another two years could be disastrous for the lower-income group.
But it's not just that low-income Americans would suffer by pushing the minimum retirement age and full retirement age of Social Security up by two years. It might actually favor upper-income earners. As The Washington Post reports, lifetime Social Security benefits can often reflect a person's socioeconomic status. The poorest Americans often lack access to adequate nutrition and healthcare, while the richest Americans have ample access to medical care and can make healthier food choices. The result is the rich tend to live longer than the poor overall, and thus they collect more in Social Security benefits over their lifetime. The problem is Social Security is a luxury for the rich, whereas for the poor it's a necessity, and Christie's plan doesn't appear to address this.
The most popular Social Security fix
As I said, this isn't a flip-of-the-switch fix where everybody's happy in the end.
According to The Washington Post, which conducted an informal study last year that allowed online respondents to select which of 12 methods they'd support to fix Social Security (respondents could select all that appealed to them), boosting the earnings cap on the payroll tax proved to be by far the most popular fix.
In total, 70% of respondents favored raising the payroll earnings cap, which in 2015 sits at $118,500. What this means is that upper-income earners won't pay a single cent in taxes into the Social Security program beyond their $118,500th dollar of income. As you might imagine, there aren't too many people in this camp. On the other side of the coin, we have the majority of Americans who are paying Social Security payroll taxes on every cent they earn. This disparity has led to calls for a significant boost to the earnings cap on the payroll tax. The problem with boosting the payroll cap, or even eliminating it completely, is it only partially resolves the budget shortfall. More expense cuts or tax revenue increases would be needed.
Raising the retirement age was actually the second most preferred fix, but it sat way behind the payroll cap increase with just 45% of respondents in favor of such a change. More importantly, though, the respondents in this study were only under the impression that the full retirement age would be slowly raised, and that the age at which minimum retirement benefits would be hit would remain unchanged at age 62.
But, of course, there are downsides to this plan. As noted above, raising the retirement age could hurt low-income retirees, while raising the earnings cap could dramatically boost taxes for the wealthy without giving them much of a boost in the way of increased benefits come retirement.
Simply put, there is no easy fix, but we're probably going to see a bounty of Social Security plans come to the forefront during the 2016 presidential election.
What Social Security "fix" do you favor? Sound off in the comments section below.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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