Reducing social security benefits is not such an absurd idea as it sounds – The Motley Fool

This month, nearly 63 million people, many of them elderly, will receive a Social Security Allowance. According to the Social Security Administration, just over 3 in 5 retirees rely on this guaranteed monthly payment to make up at least half of their income. In other words, the poverty rate of the elderly would probably increase without the financial base provided by social security.

The $ 13.2 billion social security problem

However, the largest social program in the United States is facing what could arguably be its biggest hurdle since its inception in 1935, at least according to the latest annual report of the directors.

Source of the image: Getty Images.

Published in early June, Directors report that the program will undergo a change in 2018 that we have not attended for 36 years. Namely, social security will spend more than its revenues. Although we are talking about only a $ 1.7 billion net cash outflow, which is peanuts compared to the $ 2.89 billion that the program has in stock of assets, this annual output is expected to grow rapidly in 2020 and beyond. If spending continues to outstrip revenue, Surplus cash surplus of $ 2.89 billion from Social Security could disappear by 2034.

What does it mean, exactly? The good news is that it does not mean the end of social security. The two recurring sources of income from the program – the 12.4% wage tax on earned income and the taxation of benefits – would remain intact and provide funding for the payment to eligible beneficiaries. The bad news is that it signals a potential reduction in profits of up to 21% by 2034.

The directors' report then projected a cash deficit of $ 13.2 trillion between 2034 and 2092. The only way to deal with this mess is to increase revenue, reduce spending, or combine the two.

In general, virtually no solution is less popular among the population than the reduction of social security benefits. As we have mentioned, the majority of today's retirees depend on the program for the majority of their income. Reducing benefits could expose retirees to the inability to meet their retirement obligations.

Source of the image: Getty Images.

Reducing social security benefits is a better idea than you probably realize

However, as crazy as it may seem, reducing social security benefits is not such a bad idea. If the measures are taken correctly, benefit reductions could be positive for the program in more ways than one.

Let's be clear: when I talk about "benefit reduction", I do not describe a scenario in which the federal government takes its proverbial scissors and simply eliminates a percentage of what the current retirees must receive each month, as described in the report. administrators. Instead, these reductions would be passed on in the form of a full retirement age gradually increased.

Your retirement age is the age at which you become eligible to receive your full retirement benefit, based on your year of birth. It should peak at age 67 for workers born in 1960 or later. By gradually increasing the full retirement benefit to 70 years, for example, current retirees would be protected against any possibility of reduced benefits, but future generations of workers would have to make a choice. Either they had to wait longer before receiving their full monthly payment, or they had to apply for early repayment and significantly reduce their monthly benefits. Regardless of their choice, lifetime benefits paid by the program would fall over time, compared to the current payment schedule, with a retirement age of up to 67 years. These savings could be enough to fully bridge the estimated cash deficit of $ 13.2 trillion until 2092.

Source of the image: Getty Images.

Three reasons why reducing profits makes sense

You're probably wondering, "How is this a good thing?"

For starters, this takes into account the adverse impact longevity has had on the program since its inception. Between 1935 and 2022, the age of retirement will only increase by two years. Meanwhile, average life expectancy has increased by nine years since 1960, and more Americans have reached the age of claim under Social Security. Raising the full retirement age would reduce the time pensioners rely on the program, aligning the program more closely with the way it was designed in 1935.

Second, it would protect current retirees from any possibility of benefit reduction. By adjusting the retirement age, only workers whose eligibility for social security is assumed to be ten years or older would be affected.

Finally, with social security replacing only 40% of the average worker's salary in retirement, a reduction in lifetime benefits should force Generation X, Generation Y, and Generation Z to save more on their income and invest in their careers. to come up. themselves less dependent on the program. In the United States, with personal savings rates being anemic, anything that encourages better savings and investment habits would be a good thing.

But, as I said before, no social security solution has more long-term meaning than a two-party fix. In addition to raising the retirement age, a solution regularly proposed by the Republicans, it would be appropriate to change the ceiling of taxable income, proposal of the Democrats, to increase revenues. This combination of solutions would make it possible to tackle the fundamental problems of social security much better than a solution to a party.