A government panel created by President Obama is recommending significant changes to the Social Security program. The National Commission on Fiscal Responsibility and Reform released a list of recommended cuts to the federal budget this week. Proposals that could impact retirement savers include raising the retirement age and reducing cost-of-living adjustments for Social Security recipients. Here is a look at the panel’s suggested changes to Social Security.
Raise the retirement age. Seniors who retire in 2010 can claim the full Social Security benefit they are entitled to at age 66. Under current law, the full retirement age will increase to 67 for workers born in 1960 or later. The deficit commission recommends further increasing the retirement age by one month every two years. This proposal would cause the retirement age to reach 68 by 2050 and 69 in 2075. There would be a hardship exemption for seniors unable to work past age 62. The commission calculated that this proposal would eliminate 21 percent of Social Security’s projected shortfall.
Reduce cost-of-living adjustments. Social Security payments are currently adjusted annually to keep up with inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. The commission recommends using a different measure of inflation, the chained CPI, which has historically produced an average of 0.3 percent smaller cost-of-living adjustments each year. The smaller increases would accumulate over the course of retirement. Stephen Goss, chief actuary of the Social Security Administration, calculated that a 75-year-old retired worker who had 13 cost-of-living adjustments applied to his payments would have a 3.7 percent lower benefit on average using the chained CPI than under current law. Some 26 percent of Social Security’s deficit could be eliminated by switching to smaller cost-of-living adjustments.
Increase the Social Security tax cap. Workers pay into the Social Security trust fund on earnings up to $106,800 in 2010. About 86 percent of worker earnings were subject to Social Security payroll taxes in 2009. The commission proposes gradually increasing the taxable maximum to capture 90 percent of wages by 2050. Over a third (35 percent) of Social Security’s shortfall could be erased by raising the taxable maximum.
Reduce benefits. The commission wants to change the benefit formula in a way that will reduce the amount of working income Social Security replaces for workers in the 50th percentile or higher. This benefit reduction would be gradually phased in by 2050 and could cut Social Security’s underfunding nearly in half (45 percent). But this proposal is projected to result in significantly lower payouts for middle class, upper middle class, and especially wealthy retirees.
Bring more people into the system. Almost all American workers (94 percent) pay into the Social Security system. But there are a few groups of people who don’t participate including many state and local government workers, federal workers hired before 1984, and ministers who opt out. The commission aims to include newly hired state and local government workers in the Social Security program after 2020, which would reduce about 8 percent of the funding deficit.
Create a minimum benefit. A new proposal would add a Social Security minimum benefit to keep full-career minimum wage workers above the poverty threshold. The minimum benefit would be wage-indexed to keep up with the cost-of-living. The commission is also considering a benefit boost for the oldest retirees. These two proposals combined would increase Social Security’s projected deficit by 16 percent.
New claiming strategies. The panel proposes giving retirees the option to collect half of their Social Security benefit early and the other half at a later age, with the hope that workers will use this money to transition into a second career. This proposal is estimated to have a negligible impact on the Social Security trust fund.
Encourage delayed retirement. The commission recommends developing an education campaign to encourage workers to save more for retirement, delay retirement, and pursue partial or phased retirement options. More education would also be provided about the costs and benefits of collecting Social Security benefits early.