United States Senator Marco Rubio jumped into the Social Security fray (and solidly into early presidential jockeying) recently with a handful of policy recommendations aimed at stabilizing the programs long-term finances. His immediate motivation is probably political, coming hot on the heels of a private audience with the Republican National Committee in Memphis, and his first trip to New Hampshire.
However, the challenges to the system are well-known. It is widely recognized that, due to the large baby boomer demographic wave rolling into retirement, the Social Security trust fund will be depleted in approximately 20 years. At that point, without any changes, Social Security will only be able to provide 77% of promised retirement benefits. Here is a nutshell version of Rubios five key points.
Increase full retirement age. The full retirement age is already scheduled to be raised to 67 for people born in 1960 or later. Estimates suggest that raising it further to 70, phased in till 2050, could reduce the SS deficit by 25%. Rubio wisely didnt specify details but would exempt those over 55 from any increase in retirement age.
COLA cut on wealthier Americans. Cost of Living Adjustments (COLAs) are a hot topic, probably because this is one way to take some action via a technical fix rather than through messy and contentious legislation. Recently, President Obama suggested using a chained Consumer Price Index to calculate COLAs, which would presumably generate smaller adjustments. Rubio proposed an interesting variation that would apply smaller COLA adjustments but only to wealthier Americans. Unfortunately, neither one of these proposals packs a lot of punch.
Federal Thrift Plan offered to all Americans. This is basically a federally run 401 (k) type of plan in which individual contributors to this plan are forced to become individual investors and will have to actively manage their accounts. Love it or hate it, this recalls George W. Bushs push to privatize Social Security, which was supported by Mitt Romney in 2012.
Suspend payroll tax for those over 65. Every employee pays a 6.2% payroll tax into the Social Security system on all earnings up to the earnings cap. This interesting idea would decrease total payroll tax receipts yet make it easier for older adults to work. Theoretically, this would delay their filing for retirement benefits and reduce system expenses. Net-net, the effect on the Social Security balance sheet is indeterminate.
Drop the earnings test. The earnings test reduces the Social Security retirement benefits paid to a person who is under the full retirement age but collecting retirement benefits while still working. Rubio suggests that dropping this provision could also remove disincentives for older adults to work since their work would not reduce their SS benefits.
WHAT RUBIO DIDN'T SUGGEST
Scrapping the cap on Social Security payroll tax. There is currently a $113,700 cap on income subject to SS payroll tax. As income has increasingly shifted to a wealthier (and smaller) portion of taxpayers, the amount of total national earning subject to payroll taxes has decreased from 90% down to 82% of national income.
This may be the elephant in the room of Social Security proposals. According to Strengthen Social Security, a coalition of over 300 state and national organizations, anywhere between 60% and 90% of the total Social Security deficit could be eliminated by removing or modifying this cap. Different proposals suggest either having all income or some income above the current cap subject to payroll tax. There is a lot of wiggle room in these options depending on the details of the adjustment. There is also a great deal of appetite for this option. The Center for Economic and Policy Research, a progressive think tank, found that scrapping the cap on payroll taxes would only affect the wealthiest 5.2% of wage earners and strong majorities of people support this option. Scrapping the cap is clearly a contentious topic placing it squarely in the middle of the growing domestic and international debate on progressive vs. regressive taxation, growing inequality of incomes and the idea of redistribution of wealth.
Many people believe that a variety of combinations of some, or all, of these fixes could easily stabilize the Social Security retirement system and provide full benefits as currently promised for the next 75 years. Hopefully we dont have to wait too long for our political leaders in Washington to stop merely making headlines but roll up their sleeves and make necessary changes.
Paul Norr is a financial planner in Thousand Oaks, Calif. and writes about planning and retirement. His website is www.paulnorr.com
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