If you are 52 years old or younger, you might want to store money under your mattress. A bleak 2019 report by the Social Security Board of Trustees found retirement funds on a path to depletion by 2035, forcing Congressional lawmakers to make swift and bold decisions on the fate of the nearly $3.0 trillion program.[1] The financial burden towards Social Security is not just a matter of money. American workers are also living longer, earning less pay, and bearing fewer children. With several socioeconomic factors at play, the Social Security Administration (SSA) may have to get creative in reforming retirement itself.
A straightforward solution would be to increase the retirement age. Currently, workers paying into the system expect to maximize their retirement at the “Full Benefits Age” (FBA), or 67 years old. These payouts are personalized, using up to 35 years of the highest monthly earnings to calculate an income consistent with one’s “working lifestyle.” The alternative option is to retire at the “Early Entitlement Age” (EEA) of 62, under the condition that the payments are proportionally reduced. Since its introduction in 1963, the premature retirement plan has become more enticing among incoming Social Security recipients.
Raising the age threshold by three years would – theoretically – delay this moral hazard as early recipients would contribute to the market until age 65. In an ideal world, proponents of the reform will see a lesser burden on the insurance pool along with more economic stimulation. Raising full benefits to 70 has the same effect, adding to the (harsh) likelihood that some Social Security recipients may not even outlive the duration of their payout. In a Machiavellian nature, SSA would utilize the leftover funds to accommodate new retirees.
Would the federal government impose a measure that would exploit the poor and frail elderly for their lower life expectancy? That is certainly a tough decision for Congressional legislators. Ethical concerns aside, however, would show that age reform may not be as efficient as it sounds. If wages are assumed to increase over time, for instance, using the 35-year calculation could make recipients receive larger payouts by retirement, offsetting whatever money was salvaged. The reform also does not incentivize workers to wait at age 70. If there is no financial penalty for receiving Social Security early, there is no reason to be “responsible” in limiting moral hazard.
Progressive economists approach Social Security reform differently. It’s not about how recipients will collect social welfare, but who it primarily aids. One suggestion outlines a plan to reform the program’s generosity by reducing benefits among those in the highest tax-bracket; about $4,917 a month or more. By concentrating the funds on low-income workers, proponents of redistribution could expect to see more retirees utilize the insurance pool as the program no longer caters to wealthy individuals and their “lavish” retirement. This could be done by slashing services or dropping the tax bracket’s return on investment – commonly known as the “replacement rate” – from $0.15 to $0.10 per dollar.
Opponents of this class-redistribution measure would caution about biting the hand that feeds the bulk of Social Security payments. While wealthier households could afford relying on private pensions and other annuities, some workers would manipulate their monthly earnings. If Congress wants successful reformation without engaging in class warfare, the new plan would have to encompass both efficiency and equity. However, there is a wide bipartisan agreement that “upper-income” workers do not pay their fair share of taxes.[2] The truth lies on payroll taxes funding Social Security. While workers and their employers collectively withhold 12.4% of wages through a “FICA” tax, these dues are legally capped at $118,500 in earnings. In other words, wealthy seniors can receive a greater return by paying less in taxes than the middle-class and low-income workforce.
The answer to the Social Security crisis may lie on a 2010 CBO report that once suggested Congress to eliminate the FICO cap entirely, requiring upper-income workers to pay the tax rate uniformly.[3] This reform option is “equitable” in that all U.S. workers would be required to withhold their earnings at a flat rate (6.2%), eliminating the wealth advantage despite the greater stress the tax still imposes on low-income individuals. Its “efficiency” is also relatively better than its competing suggestions. The additional withholdings revenue is projected to extend the trust fund exhaustion date to 2083, adding a significant number of new retirees into the annuity pool without making any modifications to its eligibility.[4] Of course, this implies that wealthy employees would consent to the “extra” tax without receiving anything for it.
It’s clear that the eventual path to saving the 85-year-old system will be far from faultless. The battle between efficiency and equity will largely depend on the needs of Congress to accommodate their 78 million beneficiaries by 2035 and the agenda FDR initially envisioned. More likely than not, the trend among these suggested reforms show a greater need to reduce benefits than to raise tax revenues. With millions of livelihoods on the line, economists hope to see their concepts make the right cuts.
Work Cited
[1] “A Summary of the 2019 Annual Reports.” Social Security, Social Security Administration, 2019, www.ssa.gov/oact/TRSUM/index.html.
[2] Sawhill, Isabel V., and Christopher Pulliam. “Americans Want the Wealthy and Corporations to Pay More Taxes, but Are Elected Officials Listening?” Brookings, 14 Mar. 2019, www.brookings.edu/blog/up-front/2019/03/14/americans-want-the-wealthy-and-corporations-to-pay-more-taxes-but-are-elected-officials-listening/.
[3][4] Social Security Policy Options. CBO, 2010, https://www.cbo.gov/sites/default/files/111th-congress-2009-2010/reports/07-01-ssoptions_forweb.pdf.
