New retirement age or higher taxes? The Social Security reform debate could go a few ways.
French workers are taking to the streets in protest as President Emmanuel Macron pushes through pension reforms that would raise the country’s retirement age from 62 to 64. More than 1 million people took part in demonstrations last week, piles of trash have accumulated after garbage collectors went on strike and public transport has been heavily disrupted.
Meanwhile, lawmakers in the U.S. are considering changes to entitlement programs in the states, with some saying the country should raise the full retirement age.
Lawmakers are on a deadline, with the trust funds that pay for retirement benefits on track to enter insolvency around 2032, according to the Congressional Budget Office. While that doesn’t mean the system would go completely bankrupt, it could lead to a 20% cut across the board for benefits.
Those cuts would affect both current beneficiaries and future beneficiaries, according to Alicia Munnell, the director of the Center for Retirement Research at Boston College.
“Something has to be done,” she said. “You either have to bring in more revenues or cut payments going out.”
Why is Social Security reform needed?
The U.S. population is aging and birth rates are on the decline, which means younger Americans are supplying less tax revenue to cover older generations’ Social Security benefits.
Some Republicans say raising the full retirement age could be a solution. The Republican Study Committee, a caucus of House Republicans, has called for raising the retirement age for both Social Security and Medicare, although the plans have yet to be introduced as bills.
Former South Carolina Gov. Nikki Haley, a 2024 presidential candidate, said earlier this month that she supports raising the retirement age for Americans currently in their 20s. Other Republicans, including Louisiana Sen. John Kennedy and South Carolina Rep. Nancy Mace, have also said lawmakers should discuss raising the retirement age for younger generations.
What is the retirement age?
Currently, people can retire as early as 62 and receive reduced benefits. It’s not until age 70 that the highest amount of benefits are awarded under Delayed Retirement Credit, even though the “full retirement age” is technically 67 for those born in 1960 and later.
There are certain provisions linked to the full retirement age, including a rule that benefits for widows and spouses will be reduced if claimed before the benchmark.
While the term can be misleading since it isn’t connected to an official retirement age, raising the full retirement age can still lead to benefit cuts for retirees.
Pushing the full retirement age to 70 would lead to a nearly 20% cut in benefits, according to the nonpartisan research and policy institute Center on Budget and Policy Priorities.
While some white-collar workers could easily take on a couple of years of work before retirement, those with physically strenuous jobs are more likely to retire early and take a benefit cut. Should the retirement age rise, that cut would be even more severe.
Currently, those who claim Social Security benefits early at 62 receive 70% of the benefits available at 67. If the retirement age were to get back to 70, those workers would receive just 55% of the benefits, according to Munnell.
“It is something that places the greatest burden on the most vulnerable,” she said.
Option No. 2: Bring in more revenue
The other option on the table for lawmakers is to funnel more money into Social Security.
Some are looking into expanding the payroll tax. Currently, the tax only applies to wages of up to $160,200 with a tax rate of 6.2% for both employees and employers or 12.4% for the self-employed.
Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., last month introduced legislation that would make the payroll tax also apply to wages over $250,000.
Another option is to increase the tax rate on employers and employees, according to Mark Iwry, former senior adviser to the secretary of the Treasury and currently a nonresident senior fellow at the Brookings Institution.
“Obviously, there are trade-offs with every possible solution,” Iwry said. A tax increase is "always painful and generally unpopular."
Iwry also noted that raising taxes for Social Security could make it more difficult to increase taxes for other high-priority purposes, like Medicare, international crises like Russia's war with Ukraine or climate change.
Another proposal is to invest at least part of Social Security reserves in private-sector stocks and bonds that tend to generate higher long-term results, but there are concerns that this could reduce benefits during market downturns.
'Kicking the can down the road'
While benefits aren’t at risk of being cut this decade, Iwry said lawmakers should work to address the issue as soon as possible.
“Every year we wait before coming up with a solution to avoid those benefit cuts, we're having to pay a higher price for the solution,” he said. “We're kicking the can down the road, and with every kick, the can gets heavier.”
While retirement may not be front of mind for those in their 30s or younger, they should be aware that Social Security is likely to change and plan ahead, according to Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute.
That could mean putting away additional funding into retirement, planning to work longer or figuring out a way to “phase through” retirement by taking a part-time job after retiring.
“I don't think anyone should be thinking that there won't be any Social Security,” he said. “There’s going to be some funding for benefits. It just won't be what's currently scheduled in law.”
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This article originally appeared on USA TODAY: US Social Security may change. What to know about retirement's future.