If you were born in 1960, 2022 is the year when you’ll hit age 62 – and if your age cohort is like your predecessors, millions of your peers (and maybe you) will opt to start Social Security benefits early, defying the wisdom of delayed gratification. But there’s something else distinctive about you who entered the world in the same year as the Kennedy/Nixon Presidential election: you’re the first group of Americans for whom “full retirement age” is actually 67. You are part of a change in the Social Security law that has been nearly 40 years in the making.
The question of how to fix Social Security is a trigger for endless speculation. But in this recent CNBC article on the topic, reporter Lorie Konish takes a speculative look at how some proposals under active consideration might affect full retirement age in the years to come, and how those not yet close to qualifying for Social Security benefits might need to adjust their plans, given the precarious state of current funding. It’s a hot topic, to be sure.
No Consensus on When “Retirement” Actually Begins
“Many Americans eagerly look forward to a time when they can stop working and officially set their status to ‘retired,’” Konish writes. “But when asked what age they anticipate that could be, there isn’t a consensus.” The average age when people say they hope to retire is 62, according to a survey cited by CNBC earlier this year. And it’s likely not a coincidence that 62 is the age at which eligible workers can first claim Social Security retirement benefits.
Of course, by now we all know, or should, that taking benefits at 62 has a major drawback. “People receive reduced benefits for claiming early,” Konish explains. “If they wait until full retirement age to claim — generally 66 or 67, depending on when they were born — they receive the full benefits which they have earned. If they wait until age 70, they stand to get an 8 percent per year benefit increase over their full retirement age.”
(For more on the question of when to file, we suggest this article published on the AgingOptions blog just last week.)
If RMD Age Goes Up, Might Social Security Come Next?
As we said at the top of this story, that full retirement age has been inching up for those born in 1955 or later, now topping out at 67 – and as we’ll see, many experts feel it needs to go higher still. Some policy-watchers infer that a few recent Congressional moves might mean a change is in the wind, for two main reasons. First, Social Security is in trouble – and, second, people are living longer.
As Konish explains, “The House of Representatives last week approved a retirement bill that would push out the age for required minimum distributions on certain savings accounts to 75, up from the current age of 72. That change, if it passes the Senate, would be gradually phased in by 2032. The proposal reflects a reality that many people today are generally healthier than generations past and therefore are living and working longer.”
CNBC’s Konish spoke with Mark Warshawsky, a former Social Security official now with the American Enterprise Institute, who thinks the new RMD rule could have a wider effect. “It should cascade to other official ages throughout the tax code and the government’s programs, Social Security included,” Warshawsky said.
No Imminent Change but an Air of Urgency
So far in the halls of Congress, there has been plenty of noise but little progress on the need to shore up Social Security. “To be sure, no imminent changes to the Social Security program are in the works,” Konish writes. “That does not mean there is no urgency around the issue, however. The trust funds that the Social Security Administration relies on to pay benefits are projected to become depleted in 2034. At that time, 78 percent of promised benefits will be payable, the government agency said last year.”
Congress has combination of legislative tools at its disposal to fix the program, either for the short term or – if political will should miraculously arise – for the long term. Lawmakers can lift the income cap that limits how much income is taxed for Social Security benefits, or they can hike Social Security payroll tax rates – or they may opt to increase the retirement age yet again. The eventual fix will probably combine elements of all three.
Some Proposals to Adjust the Full Retirement Age
Raising the retirement age is a non-starter with many Social Security advocates, who view the hike in eligibility age as a thinly-veiled cut in benefits. “Retirement ages were last altered in 1983 under then-President Ronald Reagan,” the CNBC article writes. “Those changes, which raised the full retirement age to 67 from 65, are still being phased in today.” If the threshold age were adjusted, odds are it wouldn’t affect anyone close to retirement today: when the 1983 law was passed, those currently being affected were only about 28 years old or younger.
“[Social Security] has and will continue to be the third rail of politics because of the public sensitivity around the issue,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center. “I expect that at some point in the not-too-distant future, Congress will agree on a Social Security package that includes some type of adjustment to the retirement age. Whether that’s in two years or 10 years, it’s very difficult to predict.” Hopefully, Akebas adds, there will be protections built in for those forced to retire early out of necessity.
Planning Ahead when the Outlook is Murky
As the American Enterprise Institute’s Warshawsky noted to CNBC, American work habits are clearly changing. “Just in 20 years, we’ve seen a substantial increase in the retirement age,” he said, from an average retirement age of 62 to about 66. “People really, really are working longer.” But at the same time, the pandemic appears to have forced many to make the opposite choice, retiring earlier than they had anticipated as their work prospects change.
With Social Security at risk and susceptible to benefit cuts, planning ahead is a challenge, Konish acknowledges. As one expert advises, those who are 60 and older today have little reason to fear a change in benefits. “But if you’re 45 to 60 years old, it’s reasonable to plan for benefit reductions of about 5 percent, he said. For those who are even younger, a 10 percent to 15 percent cut is possible.”
What if there are no legislative fixes? While such inaction would be political kryptonite, anything is possible in our nation’s capital. In that unlikely instance, says CNBC, “people of all ages should also plan for worst-case scenarios in which the program does reach a point where it can only pay a portion of benefits” – in other words, a possible 22-24 percent benefit cut sometime early in the next decade.
Rajiv’s Advice: Plan Ahead, and Build a Financial Dashboard
“We talk about Social Security a lot,” says Rajiv Nagaich of AgingOptions, “because it’s a program that can mean the difference between stability and poverty for tens of millions of people. So the fact that it remains such a political football is crazy,” he scoffs. “Personally, I expect Congress to get its act together and pass some sort of bipartisan fix. They have to. But there’s going to be a lot of political bluster in the meantime.”
Rajiv quickly adds, “But does that really matter? What I think people should do is to plan ahead so they’re not stuck in a terrible cycle if the worst happens and benefits get cut by 20 or 25 percent in ten years. With a financial dashboard in place and some intelligent planning, believe me, you can set yourself up so that, come what may, you’ll be secure whether our friends in Congress act or not!”
For the name of a qualified financial adviser who can help you create a financial dashboard as a guide to a more secure future, contact us. We’re eager to help.
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(originally reported at www.cnbc.com)