When designed back in 1935, Social Security was largely a pay-as-you go system focused on providing financial security to the elderly. Over the years, programs were added to include benefits for the disabled, widows and children. Today, over 59 million people receive almost $870 billion in benefits from one of several Social Security Administration programs. For 53% of married couples and 74% of unmarried persons, Social Security benefits represent 50% or more of their income.
Unfortunately, Social Security’s funding status has not kept pace with its growing scope. As the chart to the right shows, the growing number of people over 65 relative to the number of workers (i.e., the dependency ratio) is wreaking havoc on the system’s finances. Without changes, the system is currently forecasted to exhaust its reserves by 2035.
This dismal outlook is not new; economists have been predicting Social Security’s demise for years. But what is new is the urgency around finding a solution and the range of options now being considered. The first shot over the bow occurred without much fanfare last week when law makers adopted Social Security rule changes as part of the recent budget deal. Specifically, two types of popular claiming strategies aimed a maximizing married couples’ retirement benefits were eliminated.
The first, “file and suspend”, allowed a married person of at least full retirement age to file for a benefit based on his or her own earnings record and then immediately suspend it. The spouse, typically the lower earner, could then file for spousal benefits while the higher earner’s benefit (that was suspended) grew at approximately 8% per year up until age 70. This option, which allowed the higher earner’s benefit to grow while the lower earner collected spousal benefits, will no longer be available after May 1st of next year. Fortunately, those already using the strategy will be grandfathered in until age 70.
The practice of using a restricted application to maximize benefits also will no longer be allowed. Up until now, individuals eligible for either a benefit based on their own record or a benefit based on their spouse’s record could elect only a spousal benefit at their own full retirement age. After May 1st, only individuals born on January 1, 1954 or earlier can use this option. Anyone younger will loose the option to elect and automatically get the larger of the two benefits. The rules governing claiming strategies can be complicated so we encourage anyone nearing full retirement age to carefully review their options.
Up until now, politicians on both sides of the aisle have avoided addressing Social Security’s funding issues due to fears of alienating supporters of the widely popular program. But the relatively easy passage of the recent bill curbing benefits suggests change may be sooner than we think. Historically, Republican solutions focused on market based initiatives such as introducing Private Savings Accounts. GOP policy prescriptions today, however, seem to have shifted left. Republican presidential contender Chris Christie, for example, supports reducing benefits for those earning over $80,000/year and eliminating them entirely for those with incomes over $200,000.
Democratic proposals are targeting benefits for the wealthy (i.e., means testing) and raising taxes to fund benefits. Bernie Sanders, for example, supports raising the cap on the income subject to payroll taxes and expanding benefits.
Fortunately, Social Security reform no longer appears “off limits”. Efforts to expand benefits and raise taxes will likely remain controversial, but both parties seem to acknowledge that some form of means testing is needed. Raising the retirement age (given expanded life spans) is receiving bipartisan support as well. Whatever the ultimate compromise, the system is likely to be more progressive, and focused on meeting the needs of the poorest seniors than it is today.
