Can you count on your Social Security benefits when retirement rolls around?
By Mark Miller
CHICAGO — Most Americans worry about this — partly due to the nonsense they hear from political opponents of Social Security and ill-informed media. You will hear that the program is bankrupt, its reserves are nothing but a bunch of IOUs, or that Social Security is a Ponzi scheme.
All of those claims are false, but there is one good reason for concern. Social Security faces a long-term financial imbalance that would force sharp benefit cuts in 2034 unless the government makes changes. The problem stems from falling fertility rates and labor force growth — which reduces collection of payroll taxes that fund the system — and also from the retirement of baby boomers, which increases benefit costs.
Absent reform, Social Security could continue to pay roughly 75 percent of promised benefits. The cuts would mean that the typical 65-year-old worker could expect Social Security to replace 27 percent of pre-retirement income, down from 36 percent today, according to the Center for Retirement Research at Boston College.
No surprise, then, that only 37 percent of workers are “very or somewhat confident” that Social Security will be able to maintain current benefit levels in the future, according to survey research by the Employee Benefit Research Institute (EBRI) – although confidence is much higher among older workers and retirees.
From a math standpoint, potential solutions to the problem are straightforward. The cuts can be avoided through increased revenue, benefit reductions or some combination of the two. But the politics are another matter.
Republicans are far from holding a unified position on the issue. For example, U.S. Representative Sam Johnson, a Texas Republican who chairs the House Ways and Means subcommittee on Social Security, has proposed legislation containing two significant benefit cuts: gradually raising full retirement ages to 69 by 2030, and using a less generous annual cost-of-living adjustment formula known as the chained CPI.
Meanwhile, President Donald Trump has so far held to his campaign promise of opposing cuts. He has suggested that economic growth will solve the problem by stimulating wage growth and payroll tax collections – a position most economists dismiss as unrealistic.
REPUBLICAN ENTHUSIASM LACKING
The last major Republican reform proposal dates back to the George W. Bush administration, which proposed shifting the program to personal savings accounts – an idea that aroused Republican passion but that went down in flames.
“That was an idea that got people excited, but there hasn’t been much enthusiasm for Social Security reform among Republicans since then,” said Andrew Biggs, resident scholar at the conservative American Enterprise Institute. Biggs worked on Social Security reform as an associate director of the White House National Economic Council.
Meanwhile, Democrats are in no mood to work with the Trump administration on anything that forces a compromise on their core values – and they have shifted significantly to the left on Social Security reform. Representative John Larson has introduced legislation that would not only restore trust fund balance but expand benefits. That is by far the best approach, since roughly half of all households have saved less than $25,000, according to EBRI. Larson’s bill is cosponsored by more than 80 percent of the Democratic House caucus – more than any previous expansion bill.
The bill would increase benefits by 2 percent across the board, shift to a more generous annual cost-of-living adjustment that reflects spending by seniors and set a new minimum benefit at 25 percent above the poverty line. It also would cut taxes for millions of retirees by boosting significantly the threshold for taxation of benefits.
The plan raises revenue by gradually increasing the payroll tax rates that fund the program. The rate hikes would begin in 2019, and by 2042, workers and employers would pay 7.4 percent each, instead of the current 6.2 percent.
Larson, a Connecticut Democrat, also proposes changes to the payroll tax cap for very wealthy beneficiaries. Currently, payroll tax is collected only on wages up to $127,200; the plan would start collecting taxes again on wages above $400,000. That exempts more income than many earlier expansion plans, which either removed the cap entirely or resumed taxation at $250,000.
The payroll tax cap feature played an important role in boosting support for expansion legislation, according to Max Richtman, CEO of the National Committee to Preserve Social Security and Medicare, a progressive advocacy group that supports the bill. “It brought many of the more conservative Democratic legislators on board,” he said.
Of course, the Larson bill is going nowhere in the Republican-controlled Congress, so Social Security reform will not happen before the 2018 midterm elections at the earliest – and perhaps much later than that. But that does not mean beneficiaries should worry about draconian cuts in 2034.
Even if reform is not achieved by 2034, Biggs thinks the problem likely would be solved at the 11th hour through tax increases – simply because benefit cuts must be enacted and phased in over long periods to give beneficiaries time to adjust.
“If they were going to do this by cutting benefits, it should have been enacted 20 years ago,” he said. “If you want to do it by raising taxes you want to wait as long as possible, so that you get to the point where the only solution is to put more money into the program.”
But the uncertainty on Social Security policy will continue to undermine public confidence in the program — and that is worrying. Meanwhile, the clock is ticking.