For the last two weeks we looked at the trouble with Social Security: The program is bringing in less money than it pays out and will run out of reserves in about nine years.
One potential solution we looked at was increasing the revenue into the system by raising taxes. Today we look at how to solve the problem by changing the spending side. Spending solutions all, in one way or another, cut the benefits paid out.
One of the most often mentioned ways to reduce benefits is to raise the full retirement age. This is one of the changes made last time we tackled Social Security under the Reagan administration. Back then your full retirement age was 65. For most people, it’s now age 67.
So why not keep going to 68, 69 or even 70 years before you receive full benefits?
This is also related to one of the main reasons Social Security is in trouble. … We’re living longer. Back when they started the program the average age of death was 65 — and the average person never collected Social Security. Now it’s 79, and most people do.
Then there is just reducing the benefit itself. This is stealthier as it involves a rather big formula that while public (just look on the ssa.gov web site) most have no idea what’s in it. Rather than explain all the pieces and parts, let’s just say there are several proposals and all of them in some form and fashion reduce the benefits paid out. The more they reduce, the better the fix.
Ah, but there’s one more proposal to consider: Means testing. Simply put, this would reduce or eliminate benefits to higher income earners. Interestingly, this tends to also be unpopular even from those who in no way would be affected.
My guess is they’re afraid of a slippery slope where one day their own benefits will also be cut. Not that big of a deal though as there are so few higher wage earners that you could eliminate paying anything to this group, and it might fix about 20% of the problem — at most.
Then there’s cost-of-living adjustment. Let’s talk about it but just a little. There’s a lot that goes on here. Currently the cost-of-living adjustments are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers. I’ve always found this interesting as most retirees are not urban wage earners or clerical workers … something about not having a job.
There is another index out there, the CPI for the Elderly. The CPI-E is designed specifically to measure the spending habits of those 62 years-old and up, most of whom are retired. Health care spending, it should be no surprise, makes up a lot more of their expenses.
This whole area of cost of living is a lot more complicated than it seems (and don’t get me started on “chained CPI”). But while I think a change would be better, it will likely be of minimal benefit to either seniors or the program’s fiscal health.
Well, there is one idea, which is to purposely lower the cost-of-living adjustment to be less than the actual change in the cost of living. To do that is to guarantee that as retirees get older, their standard of living will decrease each and every year. No, just don’t even think about that. Do you hear me, Congress? No.
Next week: My take on what we should do.
Gary Silverman, CFP® is the founder of Personal Money Planning, a retirement planning and investment management firm located in Wichita Falls. You may contact him at www.PersonalMoneyPlanning.com.
This article originally appeared on Wichita Falls Times Record News: Silverman: Lower benefits to fix Social Security?
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