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 ofTrustees
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.
- Raise
the Full Retirement Age to 69.
- Cut
benefits for above-average earners.
- Reduce
cost-of-living adjustments (COLAs).
- Eliminate
the COLA for individuals with income greater than $85,000 ($170,000 for
couples).
- 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.
NEXT: Solving the Deficit with
Added Revenue
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 inthe 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.