Source: Jeb Bush.
With a full field of presidential hopefuls from both parties, candidates are doing anything and everything to make a name for themselves before the November 2016 election. While certain candidates have used hairstyles and uninhibited commentary to draw the public's attention, others have turned to their potentially controversial reform or growth policies to garner attention and support from voters. One of those candidates is former Florida governor and Republican candidate Jeb Bush.
Since announcing his candidacy, Bush has taken heat from critics for being what could be the third member of the Bush family to move into the White House. However, bigger criticisms have been thrown at Bush's radical plan to reform the Social Security program.
Social Security in crisis
Social Security is the financial backdrop that, as of 2014, provided more than $850 billion in annual payments to more than 59 million beneficiaries. Though Social Security predominantly covers retired workers, it's also in place to protect the beneficiaries of survivors in case of an untimely passing, and to provide financial income for the disabled.
Unfortunately, the Old-Age Survivors and Insurance Disability Trust, or OASDI, is on an unsustainable course. The OASDI relies on revenue generated from payroll taxes, but the demographic shift that has baby boomers retiring from the workforce, and people in general living longer than ever, is expected to strain the system. As the worker-to-beneficiary ratio falls, the amount being brought in by payroll taxes won't be sufficient to cover the benefits being paid out. Based on estimates from the Social Security Administration, by 2033 the OASDI will have burned through its cash reserves.
Source: Social Security Administration.
Now here's the good news: Just because the OASDI's cash reserves would be gone, that doesn't mean the Social Security program is broke, insolvent, or unfixable. It just means Congress and the president need to be able to work out a plan that raises revenue for the program, cuts benefits for the program, or does some combination of both. If nothing is done, benefits in 2033 would be cut by 23%, preserving benefit payouts for an estimated 54 more years (i.e., through 2087).
Jeb Bush has a plan to fix Social Security
However, presidential candidate Jeb Bush has a means to fix Social Security -- and his plan is most definitely a deviation from the typical Social Security fixes his party offers.
Instrumental to Bush's plan is raising the retirement age to either 68 or 70. In 1983, legislation was passed to increase the full retirement age, or FRA -- the FRA entitles beneficiaries to a full benefits check -- in two stages. The final stage would push the FRA to 67 by the year 2027.
Bush's plan calls for boosting the FRA even further -- either one or three years more -- over an extended period. We haven't exactly had Bush narrow down whether he'd prefer 68 or 70 as the new FRA, but his suggestion is that making such a move would encourage people to work longer, adding more revenue into the system, potentially encouraging workers to save more, and coercing workers to wait till their FRA to retire, thus netting a bigger Social Security benefits check each month.
Source: Social Security Administration.
The other component of Bush's Social Security overhaul involves some form of means-testing. Means-testing involves phasing out benefits for retirees who have substantial annual income.
While Bush hasn't quoted a specific dollar amount, presidential hopeful Chris Christie has stated that his means-test involves beginning to phase out or reduce benefits for retirees making $80,000 or more per year, and phasing them out completely for retirees with $200,000 or more in annual income. The idea is that if these individuals are already generating a substantial amount of income each year, they don't need a Social Security benefits check. The money saved from paying out to well-to-do individuals could instead go toward extending the life of the OASDI for lower-income and middle-class retirees who rely on benefit payments to meet their expenses in their golden years.
Could Jeb Bush's plan actually work?
The thing about reforming Social Security is there are multiple ways it can be done. The downside is that every potential fix comes with pitfalls. Although we've mentioned some of the positives, there are notable negatives to Bush's reforms.
Source: Social Security Administration.
The big knock against Bush's Social Security fix is that raising the retirement age may not do a thing for lower-income or middle-class individuals, which is who really rely on the program. Social Security, for many low-income Americans, comprises the bulk of their income in retirement, and many low-income individuals have little choice but to claim benefits early rather than waiting until FRA or age 70. Raising the retirement age may put out of reach a benefits check that would cover the basic needs of low-income individuals in retirement.
On the flipside, cutting entitlement benefits for upper-income individuals may be criticized as well. It's not that these individuals don't have the financial means to take care of themselves in retirement so much as they'd be paying into a system that they suddenly would receive no benefits from.
So would Bush's reforms actually work? It's tough to tell without having Bush outline very specific numbers for his FRA, without knowing how many years the FRA increase would need to be factored in; and without any idea of what his means-tested phase-out limits would be. However, based on the fact that low-income individuals need benefit payments the most, and that Bush's reforms don't make a major impact for those individuals, I'm skeptical at this stage that it would fully solve the program's problems.
In the meantime, look for the other nearly two dozen candidates to offer their Social Security reform proposals in the coming months. It could be wishful thinking, but maybe, just maybe, some two dozen candidates can come up with enough good ideas that Congress and the new president can come together to enact a long-term fix for the program.
