Just how important is Social Security? According to the Social Security Administration (SSA), better than 6 in 10 seniors are currently reliant on their benefits to make up at least half of their monthly income. A recent poll from Gallup also found that more than 8 in 10 pre-retirees will rely, to some degree, on Social Security income during retirement. In short, without Social Security we'd probably have tens of millions of seniors struggling to pay their bills during their golden years.
Unfortunately, the program that more than 60 million people currently rely on for a monthly payment is in long-term trouble. Because of two notable demographic shifts -- the ongoing retirement of baby boomers and lengthening life expectancies -- Social Security will be paying out more than it receives in revenue annually by 2020, according to the Social Security Board of Trustees. By 2034, the trustees' report estimates that the Social Security Trust's more than $2.8 trillion in spare cash will be all gone, leading to what could be a necessary 21% across-the-board benefits cut to sustain payouts for future generations.
Lawmakers on Capitol Hill, and most seniors for that matter, are well aware of the Social Security cliff that lies ahead, yet no solution has been agreed upon in Washington as to how best to fix America's most important social program. However, that hasn't stopped lawmakers from introducing new legislation.
A new Republican bill aims to transform Social Security
Just last month, Rep. Sam Johnson (R-Tx.), chairman of the Ways and Means Subcommittee on Social Security, introduced the Social Security Reform Act of 2016. Johnson's legislation would seek to implement more than a half-dozen major overhauls that would purportedly "save Social Security."
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One of the biggest changes would involve raising the retirement age from 67, which is where it'll cap out in 2022, to 69. Republican lawmakers have often favored a retirement age increase since it takes into account increasing life expectancies. Since the mid-1960s, the average American's life expectancy has risen by about nine years.
Second, Johnson's Social Security bill would completely alter how the annual cost-of-living adjustment is calculated. Johnson suggests that abandoning the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in favor of the chained CPI would more accurately reflect the inflation that seniors contend with.
It would also completely eliminate the taxation of Social Security benefits by 2054, with phaseouts beginning in 2045. Currently, Social Security beneficiaries earning more than $25,000 annually, and joint filers with more than $32,000 in annual income, are subject to at least half of their benefits being taxed by the federal government. In 2015, 3.4% of the $920.2 billion Social Security brought in during the year came from the taxation of Social Security benefits.
Fourth, the bill would eliminate the retirement earnings test, which applies to people who've chosen to file for benefits before reaching their full retirement age (FRA). In 2017, the SSA can withhold $1 in benefits for every $2 in wages earned above $16,920 if you'll reach FRA after 2017, and $1 in benefits for every $3 in wages earned above $44,880 if you'll hit your FRA in 2017.
Finally, the bill looks to boost benefits for low-income earners who've worked a full complement of years but failed to generate a lot of income during their lifetime.
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Republican effort to save Social Security may end in disaster
While it may have a number of intriguing talking points on the surface, Republicans' latest effort to save Social Security could wind up financially crippling, not helping, most seniors.
1. Raising the retirement age punishes everyone
To begin with, raising the retirement age, while accounting for lengthened life expectancies over the previous five decades, would punish every single retiree under Social Security -- especially the 60% who are already filing for benefits before reaching their full retirement age. Your FRA is the point at which the SSA deems you eligible for 100% of your benefit payout. If Republicans move the bar higher, it means that today's workers would have to wait an extra two years to receive 100% of their retirement benefit.
Worse yet, your FRA also helps determine what your payout would be if you sign up for benefits anytime between age 62 and age 70. With an FRA of 66 years, claiming at age 62 results in a payout that can be reduced by as much as 25%, while waiting until age 70 could increase your payout by as much as 32% over your FRA benefit. If the new bar becomes 69 years of age, claiming at age 62 would reduce your benefit even more, and the incentive to sign up after age 69 would provide only a marginal increase over your FRA benefit.
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2. The chained CPI puts seniors in an even bigger hole relative to medical-care inflation
The Social Security Reform Act of 2016 could also devastate each and every recipient by switching to the chained CPI from the CPI-W.
By no means is the CPI-W perfect. A December 2011 comparison of the CPI-W and the Consumer Price Index for the Elderly -- a measure that looks solely at the spending habits of households headed by people aged 62 and up -- by the Bureau of Labor Statistics found that the CPI-W drastically underemphasizes medical costs and housing costs for seniors, while overemphasizing transportation, food, apparel, and education expenses. In simple terms, the CPI-W isn't accurately keeping pace with the real inflation Social Security beneficiaries are facing, especially when it comes to medical-care inflation.
However, the chained CPI is even worse. It grows at an even slower pace than the CPI-W because the chained CPI factors in the potential for consumer substitutions. In other words, when prices rise, the chained CPI takes into account the likelihood that consumers will switch out a more expensive good or service for a cheaper one. With this factor accounted for, the chained CPI would be expected to result in smaller "raises" for Social Security recipients, putting them in an even greater hole due to the effect of medical-care inflation.
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3. Eliminating the taxation of benefits hurts more than it helps
On one hand, the tax thresholds that determine whether or not your Social Security benefits are subject to taxation by the federal government haven't been adjusted for inflation in 33 years, so there's clearly some optimism behind phasing out and eliminating the taxation of benefits. Middle-income retired workers would probably receive a welcome boost in their monthly payout.
But removing the taxation of Social Security benefits also seems like a foolish move considering that the program needs more revenue to sustain its current payout trajectory, not less revenue. Furthermore, it only makes sense for higher-income individuals and couples who aren't reliant on their Social Security income to pay some level of tax on those benefits. Ultimately, removing revenue from the program by eliminating the taxation benefits could hurt more than it helps.
While there are certainly two sides to this issue, and the Republican plan to save Social Security has redeeming qualities, there are genuine reasons for future generations of retirees to be deeply concerned about the Social Security proposal Republican lawmakers have put on the table. If the plan is implemented, the real purchasing power of Social Security benefits could be greatly reduced in the years to come, which is terrible news for a majority of current and future retirees.
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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