Cutting Social Security Benefits Might Actually Be a Good Idea -- Hear Me Out




 

Let's not beat around the bush: Social Security is in trouble.

The social program relied on most in this country is closing in on disaster in the years to come, according to the latest annual report from the Social Security Board of Trustees. Beginning in 2022, the program that's been generating more in revenue than it's been paying out in benefits will reverse course. Between 2022 and 2034, an estimated $3 trillion in asset reserves will be completely exhausted, exposing the unsustainability of the current payout schedule to an across-the-board cut in benefits of up to 23% in order to preserve payouts through 2091. Considering that 62% of retired workers lean on Social Security for at least half of their monthly income, such a cut could prove disastrous.

Image source: Getty Images.

Social Security's $12.5 trillion budget shortfall, explained

You might be wondering how Social Security got itself into a projected $12.5 trillion budget shortfall between 2034 and 2091. Part of the problem lies with the ongoing retirement of baby boomers, with more than 10,000 a day leaving the workforce. As these boomers enter retirement, the worker-to-beneficiary ratio will fall. There simply aren't enough new bodies, or payroll tax revenue, to make up for their departure from the labor force.

But it's not just boomers that are to blame. We can also point the finger at the fairly steady lengthening of life expectancies over the past couple of decades. Let's remember that Social Security, when crafted and signed into law in 1935, was designed to provide a financial foundation to lower-income workers for what was presumed to be a few years during retirement. Nowadays, the average 65-year-old will live two more decades, allowing them to pull a benefit for an extended period of time.

The rich are also partially to blame. For well-to-do people, cost isn't usually a financial barrier to getting preventative medical care. However, it can be for those folks who don't have the money to spend on preventative medical care. The result is often significantly longer lifespans for the rich, and a longer period for them to pull a Social Security benefits check.

Image source: Getty Images.

The public has spoken, and it wants higher taxes to cover the funding gap

These issues leave Congress with two basic pathways to fix Social Security: boost revenue or cut benefits.

If you were to ask the American public, raising taxes rather than cutting benefits is hands-down the most popular choice. An informal poll from the Washington Post back in 2014 found that approximately 70% of online survey takers were willing to stand behind the idea of raising the maximum taxable earnings cap on Social Security's payroll tax. In 2018, only earned income between $0.01 and $128,400 is taxable at 12.4%, meaning any earned income above and beyond this amount is free and clear of Social Security's payroll tax. Most workers would like to see this adjusted such that higher-earning workers aren't exempted from this tax.

Image source: Getty Images.

Cutting benefits might actually be a smart idea

But hear me out -- what if cutting benefits actually made sense and was a positive for Social Security?

First of all, I'm not talking about slashing mandatory funding for the program by any means. Nor am I calling for the benefits of current retirees or pre-retirees (essentially those folks who are within 12 years of being eligible for benefits) be touched. Instead, I'm suggesting that systemically increasing the full retirement age (the age where you become eligible to receive 100% of your retirement benefit), or at the very least indexing it to longevity, would make a whole lot of sense.

Remember, when Social Security was signed into law, it wasn't with the intention that it would be buoying seniors for 20-plus years. Nor was it with the intention that 62% of retired workers would rely on Social Security for half of their income -- not to mention the 34% of retired workers who get essentially all of their income (90%+) from the program. Social Security is only designed to replace about 40% of the average workers' wages.

What's more, the personal saving rate in this country absolutely stinks, with just 2.9% of earnings being socked away in November 2017, according to the St. Louis Federal Reserve. Workers' failure to prioritize saving and investing leads many to be reliant on Social Security, further pressuring the program.

Image source: Getty Images.

Gradually increasing the full retirement age, or indexing it to longevity, would save the program money over the long run and possibly eliminate the $12.5 trillion shortfall. It would do this by encouraging workers to wait longer to receive their full benefit, thus receiving benefits for fewer cumulative years or by getting them to accept a steeper permanent reduction in their payout by claiming early. Either way, it would reduce the lifetime benefits paid to many future retirees.

How is this good? Namely, it would encourage better saving and budgeting habits that were seemingly lost on the boomer generation, and it would hopefully coerce Generation Z and millennials to invest their money in assets that give them a real chance at long-term appreciation. For example, while millennials have been overwhelmingly distrusting of Wall Street, stocks have historically been the greatest creator of wealth over the long run. By systemically reducing Social Security payouts by increasing the full retirement age, and giving those workers two or more decades of notice, lawmakers would be encouraging saving and investment. That's a good thing, and it'll ultimately reduce seniors' reliance on Social Security.

Now, don't get me wrong; I actually support a blended model where the core ideals of both political parties, Democrats and Republicans, are put into action. This would involve a gradual increase to the full retirement age (or an indexing to longevity) along with a higher payroll tax on either all working Americans or the well-to-do. A bipartisan plan makes the most sense of all in my opinion.

Nevertheless, excluding benefit cuts as a viable and potentially smart option to fix Social Security would appear to be a mistake.

The Motley Fool has a disclosure policy.

COMMENTS

More Related News

The Surprising Reason 31% of Baby Boomers Aren
The Surprising Reason 31% of Baby Boomers Aren't Saving for Retirement

Hint: It's not because of housing or healthcare costs.

Social Security Checks Are Increasing: What Does That Mean For You?
Social Security Checks Are Increasing: What Does That Mean For You?

Social Security Checks Are Increasing: What Does That Mean For You?

Here
Here's the Average Social Security Benefit for 2019

Social Security benefits are going up next year. This is what the typical senior can expect.

Social Security Truth or Consequences
Social Security Truth or Consequences

How well do you know Social Security rules and claiming strategies? Test yourself by analyzing some specific scenarios.

Social Security Is Getting a Raise Next Year. Here
Social Security Is Getting a Raise Next Year. Here's What That Means for the Average Recipient
  • Tech
  • 2018-10-15 10:08:00Z

Benefits are going up. But there's more to the story than that.

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Economy

facebook
Hit "Like"
Don't miss any important news
Thanks, you don't need to show me this anymore.