Should Social Security's Retirement Age Be Increased?

By Sean Williams Markets Fool.com

Social Security plays a critical role in providing a financial foundation for millions of senior citizens each year. The majority of retired workers who receive Social Security count on their benefits to provide at least half of their monthly income.

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Social Security's foundation is starting to buckle

While this financial foundation has been strong for more than 75 years, it's beginning to show signs of weakness. And, if the latest report from the Social Security Board of Trustees is accurate, it could crumble completely in less than two decades.

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According to the 2016 report from the Trustees, Social Security's more than $2.8 billion in spare cash will be completely exhausted by 2034, mainly as a result of the declining worker-to-beneficiary ratio caused by baby boomers leaving the workforce. Increasing life expectancies have played a role, too. Though Social Security isn't going bankrupt -- as long as people keep working, payroll tax revenue continues to be collected -- a benefits cut of up to 21% may be needed to sustain the program through 2090. That would put the average retired worker right on the cusp of the federal poverty level (based on 2017 dollars).

In other words, Social Security needs Congress to step up with a long-term solution.

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The importance of your full retirement age

With Republicans currently in control of the legislative branch of the government and time running out for changes to be made to Social Security, it would only seem logical for GOP lawmakers to reconsider what's been their go-to fix for years: increasing Social Security's retirement age.

Your full retirement age is determined by your birth year and is the point at which the Social Security Administration deems you eligible to receive 100% of your monthly retirement benefits. In general, your eventual payout grows by 8% for each year you hold off on filing a claim for benefits, beginning at age 62, the earliest point you can receive Social Security benefits, and ending at age 70.

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If you claim benefits before hitting your full retirement age, which for those who are turning 62 in 2017 is now 66 years and 2 months, you'll receive a permanently reduced benefit from Social Security. Likewise, if you wait to claim benefits until after your full retirement age is hit, you can actually receive more than your 100% payout. According to the Center for Retirement Research at Boston College, about 90% of seniors choose to claim benefits at or before reaching their full retirement age.

At the moment, Social Security's full retirement age is on the rise. The wheels were put in motion for this increase back in 1983, when a number of Social Security amendments were passed. By 2022, the full retirement age will have increased to 67 years for anyone born in 1960 or later.

Should Social Security's retirement age be raised?

The question at this point is whether or not Social Security's retirement age should be increased even more. After all, life expectancies have increased by more than four years since 1983, while the full retirement age will have grown by just two years over a four-decade period. This implies that seniors are able to draw on Social Security benefits for a longer period of time than ever before, which is a further strain on the program.

Some Republicans lawmakers have suggested that the retirement age be gradually increased to 68, 69, or even 70, as it would account for steadily increasing life expectancies, as well as reduce the length of time that seniors are drawing a Social Security benefit. Even if it somehow didn't encourage seniors to wait longer to file their benefits claim, it would permanently reduce their eventual payout and possibly save the program money over the long run.

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There certainly is merit to this idea. By raising the bar on the full retirement age, it would place even more urgency on working Americans to save for their future -- and they need all the encouragement they can get, given a personal savings rate of a measly 5.6% as of February 2017, according to the St. Louis Federal Reserve.

The public also seems to somewhat support the idea of raising the full retirement age. An informal poll from The Washington Post found that increasing the retirement age was the second most popular solution behind increasing the payroll tax on the wealthy.

It's probably not a perfect solution by itself

However, simply raising the full retirement age has its drawbacks, too. Namely, it would effectively reduce the payouts of all future generations of retirees. All future beneficiaries would either need to wait longer to reach their full retirement age, or they'd need to be willing to accept an even steeper permanent reduction in their monthly payout by claiming early. This would be especially hurtful to low-income retirees who may need to claim benefits early.

More than likely, the safest bet is that if the Social Security retirement age were raised, there would need to be other solutions passed along with it. I've often opined that a bipartisan approach is the only way to ensure Social Security's long-term survival. In order to counterbalance a possible cut in benefits, additional sources of revenue generation may need to be considered.

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Taxing the wealthy by adjusting the maximum taxable earnings of Social Security's payroll tax is unquestionably the most popular fix.

Right now, the payroll tax applies to earned income between $0.01 and $127,200. Around 10% of workers earn more than $127,200 annually, and any income above and beyond this point is free and clear of Social Security's payroll tax. Some people and lawmakers see this untaxed income of the wealthy as a potentially lucrative channel of revenue generation for a program facing an $11.4 trillion shortfall over the long run. And, because only 10% of earners would be impacted by adjusting the maximum taxable earnings, it's garnered a lot of support.

The possible combination of a payroll tax increase geared at wealthier Americans combined with a full retirement age increase could meld the best ideas of both political parties and preserve the program for many future generations.

It's unclear at this point what Congress will do, if anything, but the clock is ticking and seniors have every right to be concerned.

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