How Social Security Gets Fixed Matters
As more baby boomers retire, Social Security’s impending financial shortfall will become more pressing.
To restore solvency, Congress can either cut Social Security’s pension benefits or increase the payroll taxes that workers pay.
Both policies would impact how much is available for households to spend. Researchers at the Center for Retirement Research find that the benefit reductions would have an appreciably larger annual impact on retirees than would the higher taxes on workers. But the taxes would be spread over a longer time period.
The new study looks at four specific policies, two that cut retirement benefits and two that raise taxes. Each policy analyzed would equally benefit Social Security’s finances.
Gauging their separate effects required using a model to predict workers’ behavior. This was necessary because some workers might feel they should retire earlier if more taxes are being taken out of their paychecks. On the other hand, if their future pension benefits will be trimmed, they might decide to work a few more years to increase the size of their monthly checks.
One option for reducing Social Security payouts would be to delay the full retirement age (FRA) at which retirees are eligible to collect their “full” benefits. A second option is trimming Social Security’s annual cost-of-living (COLA) increases.
A two-year increase in the FRA, to 69, would reduce annual consumption in retirement by 5.6 percent for low-income, 4 percent for middle-income, and 2.2 percent for high-income retirees.
The impact of COLA reductions, small at first, would compound over time. For people who live to age 90, the COLA cut would mean sharply lower consumption – 10.5 percent less for low-income, 8 percent less for middle-income, and 4 percent less for high-income retirees.
There are a couple ways to increase the revenues going into Social Security: Congress could either raise the payroll tax rate or the dollar ceiling on workers’ earnings that are taxed.
The researchers looked at increasing the payroll tax from the current 6.2 percent to 7.75 percent. This would reduce consumption during people’s working lives by 1.55 percentage points per year. Raising the earnings amount subject to the payroll tax – to $270,000 from $127,200 currently – would have a smaller impact, decreasing consumption by 1 percent on the rare American with very high income.
The Social Security Trust Fund is currently projected to deplete its surplus in 2034, and policymakers of all stripes know a reckoning is coming. How they respond is the hard part.
The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.
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