The Social Security trust fund is estimated to reach insolvency in seven years. At that point, benefits will be cut by 24% unless a solution is agreed upon to increase funding or change the cost. Over the next 75 years, the 2025 Trustees report estimates that the shortfall will equal 1.3% of GDP or 25.1 trillion over 75 years.
Congress will have to find a solution in order to phase in any changes quickly. Some suggestions have been to raise the retirement age, raise payroll taxes, or reduce benefits. Unfortunately, there will already be benefit cuts if Congress does not pass some unpopular decisions.
There are many reasons why changes to Social Security are unpopular and potentially harmful. One reason is that raising the retirement age may disproportionately impact low-wage earners. Studies have shown that low-wage earners at the age of 65 have a lower life expectancy than high-wage earners. So raising the full retirement age further due to a longer average life expectancy may force those income brackets with below-average life expectancies to bear the brunt of a difficult policy change.
This impact disparately impacts low earners further because they are more likely to rely on Social Security Benefits for their full income at retirement. High-income earners rely more on private pensions, earned income, or assets. A rise in the retirement age forces low-income earners to either work longer or claim their social security benefits with penalties.
If retirees claim their benefits before they reach full retirement age, their benefit is reduced 5/9 of 1% for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced by 5/12 of 1% per month.
Raising the retirement age also has a higher impact on women. There are 1.5 million more women on social security than men, but the average benefit amount for women is $400 less. Women are more likely to enter retirement with lower lifetime earnings and have smaller pensions and assets than men.
Whatever policy Congress adopts to fill the impending funding gap and hopefully prevent benefit cuts to America’s retirees, it needs to address both the longer life expectancy of the average American and the differences in life expectancy for different income brackets.
One solution is a two-pronged approach that accounts for this: Raise the retirement age while changing the replacement formula. While increasing the retirement age will effectively reduce benefits, raising the replacement formula for the lowest bracket and reducing it for the middle- and upper-income brackets would allow low-income retirees to claim benefits at the current retirement age and receive current benefits if needed. This would also allow the biggest cuts to social security benefits to fall on those with other means for funding their retirement.
Bottom Line
There is no silver bullet for solving the funding gap in Social Security. Each possible solution will have unintended consequences that may impact some demographics more than others. Social Security is intended to provide financial protection for the most vulnerable. Solving the funding gap must protect the original purpose of Social Security.