With the asset reserves of Social Security trust funds expected to become depleted by 2034, Congress must act to deliver a solution that ensures the retirement benefits of Americans for the decades to come.
The road there, however, would ultimately be a heated debate regarding whether to solve this deficit through major tax increases, large benefits cuts or some varied combination of the two. The Center for Retirement Research (CRR) at Boston College recently analyzed two recent proposals which the CRR believes serve as useful “book ends” that should be considered by the public and stake holders in the retirement-planning industry.
To put the situation into perspective, the Social Security Board of Trustees recently released its 2017 report outlining the projected future of its program. It concluded that the combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance Trust Funds are projected to become depleted by 2034, with 77% of benefits payable at that time. The actuarial deficit through a 75-year period was expected to be 2.83% of taxable payroll or an increase of 17 basis points from the previous year. The CRR says, “That figure means that if payroll taxes were raised immediately by 2.83 percentage points—1.42 percentage points each for the employee and the employer—the government would be able to pay the current package of benefits for everyone who reaches retirement age through 2091, with a one-year reserve at the end.”
Of course, a tax increase won’t necessarily be an easy sell to the American people especially considering the current economic and political climate. The other option would be to consider paying the deficit with benefit cuts. That’s the main focus of a recent proposal by Representative Sam Johnson (R-Texas), Chairman of the House Ways and Means Social Security Subcommittee.
The CRR’s analysis concluded that Johnson ultimately proposes to cut the costs of Social Security by 3.11% at the expense of cutting benefits by .44%. To get there, he calls for three major changes.
the Full Retirement Age to 69.
benefits for above-average earners.
- Reduce cost-of-living adjustments (COLAs).
the COLA for individuals with income greater than $85,000 ($170,000 for
- Use a chain-weighted index for those with incomes below that threshold.
The CRR notes that because the eliminating COLA would mean the hit is harder as retirement spans increase, it’s helpful to consider how these proposals may affect someone at age 85
The CRR concludes that in this system at age 85, “low earners are basically held harmless, while medium earner benefits are cut to 77% of those provided under current law, higher earners to 40%, and maximum earners to 34%.” The employee who would experience benefits dropping to 77% of current law earned $49,121 in 2016. Meanwhile, the “high” earner, who sees benefits drop to 40% of current law earned $78,594.
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Representative John Larson (D-Connecticut), Ranking Member of the House Ways and Means Social Security Subcommittee, has a very different view involving major revenue boosts and minor benefit enhancements.
He proposes the following.
- Increase the combined OASDI payroll tax of 12.4% by 0.1% per year until it reaches 14.8% in 2042.
- Apply the payroll tax on earnings greater than $400,000 and on all earnings once the taxable maximum reaches $400,000, with a small offsetting benefit for these additional taxes.
- Use the Consumer Price Index for the Elderly (CPI-E), which rises faster than the Consumer Price Index for Urban Wage Earners (CPI-W, to adjust benefits for inflation.
- Increase the special minimum benefit.
- Raise the first factor in the benefit formula.
- Increase thresholds for taxation of benefits under the personal income tax.
The CRR concludes that “These two proposals are very useful because they essentially bracket the range of options. The American people need to let their representatives in Congress know how they would like the elimination of Social Security’s 75-year shortfall allocated between benefit cuts and tax increases—100 percent with benefit cuts, 100 percent with tax increases, 50 percent/50 percent, 75 percent/25percent, or 25 percent/75 percent?”
Defined contribution (DC) plan sponsors may also need to play a larger role in the conversation considering reports of reduced stock market returns in the near future, and the fact that several participants lack adequate savings levels to project adequate retirement readiness, the CRR says.
Social Security’s Financial Outlook: The 2017 Update in Perspective, a brief by the CRR can be found at crr.bc.edu.
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