More taxes or a new retirement age? The discussion over Social Security reform might go in several directions.
Workers in France are protesting as President Emmanuel Macron pursues pension reforms that would raise the country’s retirement age from 62 to 64. More than a million people protested last week, mounds of rubbish gathered as garbage collectors went on strike, and public transportation was severely interrupted. Why is this important?
Policymakers in the United States are currently debating reforms to state entitlement programs, with some arguing that the country should raise the entire retirement age. The Congressional Budget Office predicts that the retirement trust funds will become insolvent in 2032. While this does not imply the system will go bankrupt, it may result in a 20% drop in payments across the board.
According to Alicia Munnell, director of Boston College’s Center for Retirement Studies, these changes would harm both present and future recipients.” She believes that something must be done. The solution is to either increase income or decrease payments.
What is the need for Social Security reform?
Because the United States population is aging and fertility rates are declining, younger People are contributing less tax income to support the Social Security benefits of older generations.
Several Republicans believe that increasing the full retirement age might be a viable answer. The Republican Study Committee, a House Republican caucus, has called for increasing the retirement age for both Social Security and Medicare. However, no legislation has been submitted.
Nikki Haley, Former South Carolina governor, is a potential presidential contender in the 2024 election, stating earlier this month that she supported raising the retirement age for people in their twenties. Several Republicans have also suggested that Congress consider raising the retirement age for younger generations, including Louisiana Sen. John Kennedy and South Carolina Rep. Nancy Mace.
What is the average retirement age, and what happens if it increases?
People can currently retire as early as 62 and get lower benefits. Although the “full retirement age” for persons born in 1960 and after is officially 67, the largest benefits are not granted until age 70 under the Delayed Retirement Credit.
Several provisions are linked to the full retirement age, if raised, will affect widows and spouses and lead to a reduction of benefits.
While the term full retirement age is deceptive since it is not linked to the official retirement age, raising the full retirement age might reduce the benefit for retirees. According to the independent research and policy institute Center for Budget and Policy Priorities, raising the full retirement age to 70 would result in an almost 20% reduction in benefits.
While some white-collar professionals may easily work another couple of years before retiring, individuals in physically demanding occupations are more inclined to retire early and suffer a pay loss. If the retirement age rises, the reduction will be substantially more severe.
Those who claim Social Security benefits at 62 currently receive 70% of the payments available at 67. According to Munnell, if the retirement age were raised to 70, those employees would get just 55% of the benefits.
It disproportionately affects the most disadvantaged, she explained.
Another option for politicians is to increase funding for Social Security.
Others are considering raising the payroll tax. Presently, the tax only applies to wages of up to $160,200, with a 6.2% tax rate for employees and employers and a 12.4% tax rate for self-employed individuals.
Senators Elizabeth Warren and Bernie Sanders presented legislation last month that would extend the payroll tax on salaries exceeding $250,000.
According to Mark Iwry, former senior assistant to the Secretary of the Treasury, another possibility is to raise the tax rate on businesses and employees.
Iwry said that every viable solution has trade-offs. Tax increases are “usually unpleasant and unpopular.” In addition, Iwry advised that tax increases for Social Security could hinder tax increases for other high-priority purposes, such as Medicare, the war with Ukraine, or climate change.
Invest in private-sector stocks and bonds
Another proposal is to invest at least a portion of Social Security reserves in private-sector stocks and bonds, which tend to produce higher long-term returns. However, this raises concerns that it may reduce benefits during market downturns.
While benefits are unlikely to be lowered this decade, Iwry believes lawmakers should address the matter as soon as feasible.
According to Iwry, the longer it takes to come up with a solution to avoid those benefit cuts, the higher the price will be.
While retirement may not be on the minds of those in their 30s or younger, Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, advises them to be aware that Social Security is likely to change and to plan.
This could imply putting aside more money for retirement, planning to work longer hours, or devising a way to “phase through” retirement by working part-time after retiring.