3 Big Problems With Raising Social Security's Full Retirement Age

MarketsMotley Fool

As you might be aware, Social Security, our nation's most prized social program, is facing its biggest hurdle in its eight decades of existence. The program, which currently provides benefits to 63 million Americans each month, 70% of whom are retired workers, is set to hit an inflection point sometime soon (perhaps in 2019) that'll see more money expended than it's collecting in revenue. The last time this happened was all the way back in 1982.

According to the 2018 Social Security Board of Trustees report, a switch from annual net cash surpluses to net cash outflows will mean the whittling away of the program's nearly $2.9 trillion in asset reserves. Since ongoing demographic changes are expected to worsen this outflow with each passing year, Social Security's excess cash could be gone by 2034, at which point an across-the-board cut to benefits of up to 21% may be passed along to then-current and future retirees.

Continue Reading Below

All told, the Trustees report finds that, if nothing changes, Social Security will be an estimated $13.2 trillion short on cash between 2034 and 2092 to meet the existing payout schedule.

The American public wants answers on Social Security

Knowing this, the American public has been looking to their elected officials in Washington, D.C., to fix this mess.

Interestingly enough, the issue isn't finding solutions that would work to close this cash shortfall. Rather, the problem is that while both parties have a bona fide solution that would resolve the imminent cash crunch facing the program, 60 votes would be needed in the Senate to amend Social Security. Since neither party has had a supermajority (60 or more seats) in the Senate since the late 1970s, it would require bipartisan cooperation to make any changes to Social Security -- and finding middle-ground solutions isn't a strong point of lawmakers.

One of the most commonly proposed solutions comes from the Republican Party. Their core idea involves gradually raising the full retirement age, or the age at which you become eligible to receive 100% of your payout, as determined by your birth year. It's currently set to peak at age 67 for those people born in 1960 or later, and the GOP would prefer this figure be gradually raised to age 70. Doing so would require future generations of workers to wait longer to receive their full benefit or mean that early filers would accept a steeper reduction to their monthly payout. Either way, it reduces lifetime outlays from the program and helps to counteract increased longevity over many decades.

Raising the full retirement age is a tough sell

As yours truly has opined, the GOP solution does make sense as part of a balanced plan that also includes Democrat-proposed ideas, such as raising the maximum taxable earnings cap. But as a stand-alone idea, raising the full retirement age comes with three problems that could be tough to sell to the American public.

1. Future generations of retirees take it on the chin

As is the case with every single Social Security fix, someone has to lose and be in worse shape afterward than they were before the change was made. If the GOP were successful in pushing through a gradual increase in the full retirement age, current retirees and those folks set to hang up their work coats for good within the next couple of years would be protected from seeing a law-based reduction in lifetime benefit payouts.

However, this isn't the case for future generations of retirees, such as Generations X, Y (millennials), and Z. Working-age Americans who are set to retire decades down the line will have a higher full retirement age that may peak at 70. It means these folks will have to wait longer to get 100% of their payout or be forced to accept a larger reduction to their monthly benefit. It would place even more emphasis on future retirees to lessen their reliance on Social Security as an income source, since it won't be paying out as much in lifetime benefits as it did for their parents or grandparents.

2. It favors the rich

Secondly, raising the full retirement age is a move that tends to favor the wealthy.

As noted, longevity (i.e., life expectancy) has been increasing for decades. What was once a program that supplied a retirement payout for a few years or perhaps a decade is now a program leaned on for two decades by the average 65-year-old. But longevity varies quite a bit with regard to income.

You see, lower-income individuals and families may not have access to preventative care or prescription medicines or be able to afford emergency medical bills. The Affordable Care Act briefly helped level the playing field a bit, but the law has been mostly nullified by legislation in recent years. As a result, low-income persons have a shorter life expectancy than the U.S. average life expectancy. If the full retirement age is raised, these lower-income folks could see an already small Social Security payout reduced even more.

In comparison, the rich have no financial constraints when it comes to getting preventative medical care, emergency care, or prescription medicines. As such, the wealthy tend to outlive lower-income folks, who are more reliant on Social Security by a substantial amount and, as a result, those wealthier folks will collect a large chunk of the benefits paid by the program.

3. It takes a long time to work

Lastly, raising the full retirement age isn't a quick fix to Social Security's problems. Gradually raising the full retirement age would mean reducing lifetime outlays, thereby saving the program money. However, these reduced outlays wouldn't begin to be realized for probably a good two to three decades' time, when future generations of workers begin collecting their benefits. That's a problem when Social Security is just 15 years away from completely exhausting its almost $2.9 trillion in asset reserves.

This tends to be one of the big push-pulls between the Democrat and Republican proposals. The Democrat idea of raising the maximum taxable earnings cap would provide an immediate uptick in revenue and quickly reduce (or even eliminate) the program's cash shortfall. But as tax increases often do, it may also slow economic growth, which can weigh on the collection of payroll tax revenue over time.

Meanwhile, the GOP proposal tends to be positive for the economy over the long run, but it works very slowly in tackling the program's cash shortfall.

Ultimately, a one-party solution that involves raising the full retirement age just won't cut it.

The $16,728 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.