For seniors, there probably isn't a more important issue at hand during this presidential election than Social Security.
Seniors home in on Social Security
As of December, nearly 60 million people were receiving Social Security benefits, of which about two-thirds were retired workers aged 62 and up. Social Security, in addition to providing income for the disabled and survivors of deceased workers, can play an integral role in ensuring that low-income seniors have enough income streaming in monthly to meet their living expenses.
But there's one big problem: a sizable funding gap is set to rear its head by 2035, according to the latest report from the Social Security Trustees, if nothing is done by lawmakers.
The two biggest issues with Social Security are tied to demographic shifts. First, people are living longer than ever, which means they're able to draw Social Security benefits payments for a longer period of time. Secondly, baby boomers are retiring in increasing numbers, which is weighing on the worker-to-beneficiary ratio. In sum, there just isn't enough new payroll tax revenue being generated by new workers to offset the eventual cash outflow from the program to cover retiring boomers. Assuming Congress does nothing, by 2035 the program will deplete its cash reserves, and a 21% benefits cut will be necessary for the program to stay solvent through 2087.
On one hand, it's always good news knowing that Social Security is going to have at least something for practically all American workers come retirement. But it's worrisome that Social Security benefits could be cut considering that so many boomers are entering retirement with an inadequate amount of savings.
It's for these reasons that Social Security's importance has jumped near the top of the list for the remaining presidential candidates.
Would this recently touted Social Security fix work?
Arguably the bigger issue is deciding how to fix this shortfall. On paper the solution is simple: either cut benefits, raise extra money with taxes, or enact some combination of the two. Yet, despite around a dozen potential fixes being available, neither political party has been able to come up with an adequate solution as of yet.
One idea that's been trumpeted by a number of presidential hopefuls in the Republican Party, including Jeb Bush, Marco Rubio, and Chris Christie, who recently suspended his campaign, is raising the retirement age.
There are two main approaches to raising the retirement age when it comes to Social Security. First, there's the idea of raising the full retirement age, or the age at which an eligible retiree can file for benefits and receive 100% of their benefits. The current full retirement age, or FRA, is on the rise, and will eventually hit 67 for anyone born after 1960. Some of the candidates have proposed gradually raising this FRA limit to 68, 69, or 70 years of age.
The other approach involves not only raising the FRA, but also boosting the minimum age at which Social Security income can first be taken. Right now, any eligible American worker can file for Social Security benefits after turning 62. Under Chris Christie's detailed plan, the minimum age a worker could claim Social Security would have been gradually moved to 64.
Why tinker with the retirement age, you wonder? Adjusting the retirement age reflects the increased life expectancy of Americans, both men and women. It also encourages seniors to work a bit longer, thus giving them a better chance of collecting a healthy monthly benefit payment come retirement, and possibly encouraging a few extra years of savings. These extra few years of work would also add more revenue into the coffers of the Social Security program, thus extending its solvency even longer.
Three potential flaws of raising the retirement age
However, this solution, which was coincidentally the second-most popular choice out of 12 options in an informal poll from The Washington Post in 2014, also comes with a trio of possible shortfalls.
Perhaps the biggest issue connected to raising the retirement age is that it could wind up hurting the people that the Social Security program is designed to protect the most: low-income seniors. Seniors who are forced to file for benefits at age 62 due to income or health reasons could find (especially if the FRA is raised but the minimum retirement age isn't) that they're receiving less than 60% of their FRA each month if the FRA is raised up to age 70. Having to deal with lifetime benefits that are well below an individual's FRA could make meeting essential expenses very difficult.
It's also worth mentioning that not all seniors have the luxury of working until age 62 or beyond. Our bodies are all different, and our health is completely unpredictable, so to assume that because we're living longer we can also work longer may be a misguided assumption.
The second concern is that raising the FRA and/or minimum retirement age may wind up enhancing benefits for those who need it least: the rich. Individuals and families with higher incomes have usually had easy access to medical care over the course of their lifetimes. People with lower incomes don't always have this luxury. Thus, we often see a marked difference between the life expectancies of the so-called rich and poor, with the rich, on average, outliving the poor. If the FRA and minimum retirement age are raised, it means the poor will have to wait even longer to file for benefits, and it probably means the bulk of these lifetime benefits will go to the rich since they'll usually outlive the lower-income individuals who need Social Security income the most.
The final flaw with raising the retirement age is that it could substantially hurt the benefit potential of women. As a group, women tend to be paid smaller lifetime benefits than their male counterparts because they don't often work as many years, and they aren't paid as much. This can sometimes mean that women are more reliant on spousal and survivor income during their golden years. However, if the FRA is raised, it could further reduce benefits for women if their spouses are forced to file for benefits at an earlier age, for either health or financial reasons.
What's the right solution to fixing Social Security? It's a tough question to answer because every solution has potential benefits and pitfalls, but my belief remains that an eventual fix will likely include some combination of increased taxation and benefit cuts in order to bridge the eventual cash reserve shortfall.
What's your solution to fixing the Social Security shortfall? Sound off 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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