How do the Republicans plan to save Social Security and keep it solvent for the generations to come? If you think a possible Social Security fix may only impact those with a high income, you need to check this out. This is a plan that will affect EVERYONE!
Changes Are Necessary
Whatever your political affiliation is, I’m sure you’ll agree that SOMETHING needs to be done about Social Security. We are now within 15 years of facing the real possibility of benefit cuts. Most projections suggest that benefits will have to be cut by around 25% if nothing is done. Most people CANNOT afford this!
In 2018, the average monthly social security benefit was $1,413. If that was cut by 25%…the average benefit would go down to $1,088. That’s only $77 dollars above the poverty line.
Needless to say, something needs to be done before this cut happens. While the wheels of change are moving PAINFULLY slow, both parties have suggested multiple fixes in an effort to ensure these cuts DO NOT happen.
Which Way Will it Go?
In all of these proposals that have been suggested there are two that continue to come up over and over as the individual political party’s favorite:
The Democrats would like to increase the taxable earnings cap. This would be a tax increase on higher income individuals. (More detail on this shortly.)
The Republicans’ plan that is most popular is to increase the full retirement age. Their rationale for this is that the full retirement age hasn’t been adjusted since the 1983 amendments and the system needs to adjust for increasing life expectancies.
When you look at the data, they have a valid point. In 1940, life expectancy for a 65 year old was 76.9 years for a man and 78.4 years for a woman. Since that time, life expectancy has risen by more than six years for 65-year-olds, to 83.1 years for men and 85.6 years for women. So, a promise to provide retired workers with a certain monthly benefit for the rest of their lives is significantly more expensive than the same commitment made to recipients in 1940.
Consequences of Change
Individuals are living longer and these payments are being paid for a lot longer. If you stop there, it makes lots of sense to raise the full retirement age as the Republicans are suggesting. However, as with everything, there would be a few unintended consequences.
For example, if the full retirement age is increased, this means that the corresponding reduction for filing early would be much steeper as well.
Currently, if your full retirement age is 67, and you file at 62, you’ll receive 70% of your full retirement age benefit amount. If the FRA is raised to 70, and the reductions stay the same, an individual would only receive about 55% of their full retirement age benefit at 62.
To put this into numbers, imagine that an individual’s full retirement age benefit is $1,413. If the FRA is 67, the penalty for filing at 62 would be $424 which would result in a benefit of $989. If the FRA was increased to 70, the penalty for filing at 62 would be $636, which would result in a benefit of $777.
One of the big questions here is whether the filing behaviors would change. Currently, about 33 percent of all retirees simply file at the earliest age possible…age 62. If the increased penalties didn’t change this behavior, and individuals continued to file at the earliest age possible, we’d see more seniors with household incomes under the poverty line and possibly a further drain on other government programs to help meet their needs.
How to Mediate the Issue
Some have suggested that the fix for this is to increase the minimum age of eligibility to around 65. If this happens, you could see a scenario where more individuals may begin to file for disability benefits—which are not reduced for filing age. This is because nearly half of all workers leave work earlier than they expected and 61% of those individuals cite health reasons.
This means that 30% of all workers are leaving work earlier than they want to for health reasons. If the only Social Security benefit that’s available in your early 60s is disability, I would expect those applications to skyrocket. IF the SSA saw a big uptick in the number of disability cases, it could easily dampen the effect of having increased the full retirement age.
How Your Income Could Be Affected
Those opposed to the idea of increasing the full retirement age say that though raising the retirement age affects everyone equally in a rough sense, as it affects incomes unequally. This is because those with a low income tend to depend on the income from Social Security MORE than those with a high income.
(This is one of the reasons that the Democrats say they will not accept this as a standalone plan because the impact would be greatest on lower income individuals.)
My opinion is that the full retirement age WILL BE increased as part of the overall solution to shore up the trust fund. How much it will increase is likely the only question that remains. I suspect that it will only be raised by a small amount and will take several years to get there. So you can probably see by now that the fix isn’t as easy as it seems on the surface. But as new proposals are made, I’ll be sure to keep you informed.
I want to thank you for taking the time to get informed. Being informed gives you choices – and can make a big difference in YOUR RETIREMENT! Please continue to stay informed!
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