Social Security benefits will be cut at the start of 2017 for everyone who has yet to turn 62.
Those cuts will grow in each year to 2022, reaching 7 percent for everyone now 56 and under, as the official retirement age rises two months per year to 67.
Those benefit cuts are part of the daunting math for Social Security and the federal budget that could cause speed bumps for, or perhaps even curb, President-elect Donald Trump’s big fiscal plans.
1) Once the retirement age rises to 67, Social Security’s early retirement penalty will cut annual benefits by 30 percent for those who retire at 62, up from 25 percent today. The problem is that Social Security benefits aren’t especially generous to begin with. Consider that people with career earnings equivalent to roughly $30,000 a year retiring today would receive just a poverty-level benefit for the rest of their lives if they faced a 30 percent early retirement hit.
2) The Congressional Budget Office affirmed recently that Social Security’s Trust Fund is on course to run out in 2029, which will end the program’s authority to run cash deficits funded by new government debt. At that point, a massive 29 percent across-the-board benefit cut — affecting the disabled and retirees of all ages — would be needed to bring benefits in line with program revenue.
3) If you take that 29 percent cut on top of a 30 percent early retirement penalty, those retiring at 62 would get just 50 percent of their current full-retirement benefit, essentially abandoning the idea of a Social Security safety net for early retirees.
4) In January, the CBO released updated budget projections that extend for an additional year, through fiscal 2027. That’s likely to show a Social Security cash shortfall of $450 billion in 2027 alone, part of an overall federal budget deficit well north of $1 trillion. At that point, the trust fund’s demise will be just two years away, according to CBO projections.
The take-away is that the day of reckoning for Social Security, which has always been comfortably off in the distance, now appears to be just around the corner. That could make the budget math for Trump’s fiscal ambitions even more contentious.
To be clear, Trump has been firmly against cutting Social Security benefits. Yet that raises the question of how the massive revenue gap will be filled, and that question creates one more potential snag for the coming push to rev up the economy.
For investors enjoying the postelection rally, questions are mounting over whether a looming tussle over fiscal policy will limit Trump’s fiscal fuel. If so, that could curb expectations for better growth and higher interest rates, which have been a positive for financial firms like JPMorgan Chase (JPM) and Goldman Sachs (GS). A more modest boost to infrastructure spending could limit the benefit to steel makers like Nucor (NUE). Corporate tax cuts that depend on $1 trillion in revenue from the House GOP border-tax adjustment could be a big negative for retailers like Wal-Mart (WMT).
The outcome of the fiscal debate will largely depend on internal GOP dynamics. Yet the potential flare-up of political heat over Social Security’s future is a wild card that may depend on whether Democrats, who have long downplayed the retirement program’s financing problems and, more recently, pushed for broad-based benefit increases, suddenly start to sound the alarm about its future. That about-face is hardly certain, but shifts in political power have been known to bring about such unexpected ideological swings.
The benefit cuts coming in 2017 stem from a 1983 pact between President Reagan and the Democrat-led Congress to stave off an imminent Social Security financing crisis. They also sought to address Social Security’s long-term funding gap by including a hike in the official retirement age from 65 to 67 in the far-off future.
The retirement age rose from 65 to 66 in two-month increments from 2000 to 2005. Now, although the retirement age is set to rise again, Social Security faces a far more severe and permanent funding crisis. Yet that 1983 pact is pushing the limits of age-related reforms, because early retirement penalties are becoming so large that they are like a crack in Social Security’s foundation.
The early retirement penalties are intended to be an actuarially fair trade-off, allowing people to get a benefit that’s smaller but runs for more years. But while it may be fair, that doesn’t mean it won’t hurt members of the working class who live long enough to deplete their savings.
A number of GOP proposals to reform Social Security would further hike the official retirement age, while raising the earliest retirement age, now 62, in tandem. That approach would avoid further increases in penalties for retiring early. Instead of further eroding the benefit that seniors will rely on late in life, workers would face the penalty in their early 60s. Ideally, they would keep working longer so that they’d be able to spread their savings over fewer years of retirement.
Yet a rise in the earliest retirement age would most affect those who have difficulty extending their careers and little savings to fall back on. Social Security Administration data show that about 30 percent of beneficiaries in their early 60s rely on the program for at least 80 percent of total income.