Insolvency continues to loom for Social Security.
Yet while Social Security is expected to be in the red by 2034 unless Congress intervenes, a recent report from the Bipartisan Policy Center, “Securing our Financial Future,” examines some potential changes that could be made to help Social Security.
In addition to providing proposals on improving access to workplace retirement plans, advocating for lifetime income options, and exploring the use of home equity in retirement, the Commission on Retirement Security and Personal Savings proposed 12 recommendations to shore up Social Security retirement benefits. Ultimately, the answer is in the hands of Congress, but some form of these recommendations may be implemented as part of future reform.
The Commission made the following key recommendations:
- Raise the retirement age gradually to age 69 (from 67 today) while simultaneously increasing the maximum retirement age to 72 (from 70 currently). To accomplish this, starting in 2022 the age thresholds would be increased by one month every two years for the next 48 years.
- Cap spousal benefits for new retirees at half of the 75th percentile for those who reach age 62 in 2022. This would reduce benefits for higher-income households where one spouse worked sparingly or didn’t work outside the home and is requesting spousal benefits based on the higher-income earner’s work history.
- Enhance survivor benefits so that widows and widowers receive 75% of their deceased spouse’s benefit in addition to their own benefit. Initial benefits for married couples would be adjusted slightly so that total lifetime benefits for married couples on average would be unaffected. Basically, this provision shifts the timing of benefits to improve retirement security for survivors, especially those who outlive their spouse by many years.
- Gradually increase the Social Security taxable wage base to $195,000 by 2020 (from $118,500 in 2016) and indexed thereafter based on wage growth plus and additional 0.5% each year.
- Hike the Social Security payroll tax by 1.0%, split among employees and employers (from 6.2% each to 6.7% and implemented gradually over 10 years).
- Increase taxation on Social Security benefits for the highest income households. Those reporting more than $250,000 ($500,000 for couples) would see 100% of their Social Security benefits taxed as opposed to 85% currently.
Social Security is a critical component in providing retirement income for many investors. While it may be difficult to predict how the program may change in the future, the solution may involve a combination of higher taxes and reduced benefits for some retirees. Individuals saving for retirement should take that into consideration when forecasting savings needed to fund a comfortable retirement.
Making the right decision on claiming Social Security benefits can also translate into thousands of dollars of benefits over the course of retirement. Putnam’s investor education article, “Optimizing Social Security: Five things you need to know,” reviews claiming strategies. Seeking professional advice can be vital, and a financial advisor can help individuals and couples understand the different ways to claim Social Security to try to maximize benefits.