As we dive headlong into the election season, one issue continues to creep to the forefront of the debate: Social Security.
Social Security has a retirement problem
The Social Security program currently covers about 60 million people, of which two-thirds are retired workers. Although the Social Security Administration suggests that benefits from the program are only designed to replace 40% of a workers' income during retirement, a study released last year from AARP showed that 51% of respondents planned to lean more heavily on Social Security income during their retirement. We're at an inflection point where baby boomers are entering retirement at a rapid pace, and many simply don't have an adequate financial base to retire comfortably.
But here's the real crux. The Social Security program is on pace to burn through its remaining cash reserves by 2035. The retirement of baby boomers is weighing on the worker-to-beneficiary ratio and pushing it lower, while retirees themselves are living longer than ever, allowing for an extended period of benefit payments. This is all working out to an unsustainable path for the Social Security program. The Social Security Trustees' report, which estimated the above timeframe, suggests that if Congress does nothing, the program would necessitate at 21% benefits cut to sustain itself through 2087.
Thus we have Social Security's "retirement problem" in a nutshell.
Social Security fixes vary wildly
What Americans, both retired and still working, have been looking for from this year's remaining presidential candidates is a clearly defined plan to fix this shortfall. On paper there really are only three choices: boost tax revenue, cut benefits, or offer some combination of the two. Despite this seeming simplicity, decades of debate have yielded no accepted solutions.
Some candidates, such as Bernie Sanders and Hillary Clinton, both front-runners for the Democratic Party, have suggested they'd expand benefits for seniors under Social Security. Both agree that wealthier individuals should be paying more into the system.
However, other candidates' Social Security fixes could actually lead to a reduction in your lifetime benefits.
Two proposals, one common theme
Whether they are in pinpoint detail or glossed over, the Social Security proposals offered by Republicans Ted Cruz and Marco Rubio, both have one thing in common: the potential to reduce lifetime benefits.
Let's very quickly summarize the key talking points of these candidates' plan, and then we'll get to the meat and potatoes of why these candidates could mean lower lifetime Social Security benefits for you.
- Ted Cruz: Cruz's approach can be fanned out into three main talking points. First, he'd like to gradually increase the retirement age to reflect a population that's living longer than ever. Secondly, Cruz wants to change how benefit increases occur. Instead of tying increases to the traditional Consumer Price Index, he wants to use the chained-CPI, which factors in changing consumer spending habits as prices rise. Lastly, Cruz is for the creation of privatized accounts for a small portion of the payroll tax that workers contribute to the program.
- Marco Rubio: Rubio, as well, has a three-point approach to fixing Social Security. Rubio would first suggest raising the retirement age to account for longer life expectancies. Secondly, Rubio would reduce the rate of benefit growth for beneficiaries in higher income brackets who are far less reliant on Social Security income. Third, he'd remove the current 12.4% payroll tax on workers who've reached the qualifying Social Security retirement age to encourage them to work longer and save more.
Among these two candidates, there's plenty of cause for individual skepticism. Cruz's plan to privatize a portion of taxpayers' income runs the risk of imploding if workers and retirees aren't financially savvy and make poor decisions with their money. Similarly, Rubio's plan to reduce benefits growth for the wealthy, could draw backlash from the well-to-do who've paid their share into the program over their lifetime.
But, one common theme stands out among both candidates: a solution involving a raised retirement age.
Will your Social Security benefits drop?
On paper, raising the retirement age might be a great idea. It would, in theory, encourage people to work longer and save more, and it could add more tax revenue into the program (save for Rubio's proposal, which would eliminate the payroll tax for qualified individuals).
But, raising the retirement age comes with one massive potential flaw: It could enhance the lifetime benefits of the rich while further hurting the low-income retirees that these candidates have vowed to protect.
The issue at hand is this: Low-income retirees rely on Social Security to a far greater extent than well-to-do retirees. In many instances, low-income retirees may be forced to take benefits at an earlier age, well before they reach their full retirement age, or FRA. If the FRA were raised to 70, but the minimum retirement age remained at 62, early filers at age 62 would wind up with a benefit equal to just 57% of their FRA. At this level it could be a struggle for retirees to meet their month-to-month living expenses.
It's also worth mentioning that simply working longer to reach your FRA may not be an option for some individuals. Our health is not something that can be predetermined. Occasionally our health, or that of loved ones, comes first and we simply aren't able to work into our golden years.
On the flipside, wealthier retirees could see their incomes soar as FRA's rise. This is because wealthier individuals have no financial constraints when it comes to getting medical care or healthier foods. Since the rich live longer than the poor, they should, on paper, be able to collect more in lifetime benefits.
According to a study put out last year by the National Academy of Sciences, the life expectancy at age 50 for a lower-income male has fallen by about a half-year, while lower-income females at age 50 have seen their life expectancies decline by an average of four years. We'd likely wind up seeing the lifetime benefits of a vast majority of Americans (especially those who need it most) decline if either of these two proposals were fully implemented.
Adding fuel to the fire, raising the retirement age isn't a foolproof solution. It would wind up reducing the cash shortfall in the Social Security program by about a third, but it would still require additional tax revenue or benefit cuts to bridge the difference.
To be clear, nothing is set in stone for any of these candidates right now, and getting into the Oval Office doesn't guarantee in any way that their plan will pass muster with Congress. However, it's important to understand how these dynamics could affect you in your golden years. I'd suggest paying close to each candidate's detailed plans on Social Security reform, as it's a program that affects practically every working American.