Social Security is just as important to those collecting it today as to those who will collect it 30 years from now. Those monthly annuity checks are responsible for helping 88% of retirees make ends meet, according to a Gallup poll. And 82% of non-retirees are expecting it to help fund their retirements when they get there.
That's why, when the 2023 Trustee's Report projected the Social Security Trust Fund would exhaust its cash reserves by 2034 one year earlier than reported last year, it set off so many alarms among policymakers. If and when the cash reserves are depleted, a cut to Social Security benefits may be necessary.
The future of the American public's retirement is now in the hands of lawmakers on Capitol Hill. And with new leadership in the House, there may be a glimpse of what Republicans will push for when it comes to Social Security reform.
Here's what newly elected Speaker of the House Mike Johnson has to say about Social Security.
The must-read Mike Johnson quote on Social Security
Mike Johnson hasn't taken a hard stance on what to do about Social Security since becoming Speaker. However, as Chairman of the Republican Study Committee (RSC), he put together a budget proposal in 2019 titled “Preserving American Freedom.”
The budget went over various taxes, regulations, and government programs, but of significant interest is the committee's plan to improve the solvency of Social Security. Johnson decries the Democrats' plans to save Social Security by raising taxes. It won't work, he says.
“The hard reality is that we cannot tax our way out of the impending bankruptcy of Social Security.”
In other words, Johnson believes (or at least once believed) that the only way to protect the longevity of Social Security is to cut benefits now. Specifically, one aspect of his plan proposed incrementally raising the full retirement age until it reaches 69 years old. What's more, the age of early eligibility will also climb at the same pace until it reaches 64.
But Johnson and the RSC suggest Congressional inaction likely means the full retirement age will need to climb to age 70 to ensure Social Security's long-term solvency. To be clear, this is a benefits cut.
The Social Security Administration examined the impact of raising the full retirement age from 67 to 68 or 70. It expects raising the retirement age to 68 would result in a 6.2% to 7.4% reduction in lifetime benefits. Raising it to 70 would result in an 18.1% to 20% decrease in benefits.
Meanwhile, the Trustee's report suggested it'll have to cut benefits by 23% starting in 2034 to maintain solvency. Johnson's plan isn't much better than that.
Can Congress save Social Security?
Many Democrats generally maintain that they can protect Social Security by raising taxes.
Specifically, Joe Biden proposed that earnings in excess of $400,000 per year should be subject to the 12.4% Social Security tax. Current law only requires workers to pay Social Security tax on the first $160,200 of earnings per year. That number will rise to $168,600 in 2024.
However, Mike Johnson might be right. A new tax on those earning more than $400,000 per year won't by itself necessarily stop Social Security from going bankrupt in the long run. An analysis from the Social Security Administration suggests implementing such a tax plan starting next year will only extend the life of Social Security's cash reserves by another 10 years.
One solution is to raise Social Security payroll taxes for everyone. An immediate 3.8 percentage point tax increase would completely wipe out the shortfall and fund Social Security indefinitely, according to the SSA. But that would have a severe negative impact on low-income households.
It seems the American public is in need of a compromise if it wants to maximize the long-term potential for Social Security.
The good news is both Republicans and Democrats are eager to push through reforms for the program. And it'll be essential for the two parties to come together and figure out a solution with a divided House and Senate.
What you can do about it
It's important to remember the worst-case scenario in this situation. If Congress is unable to reform the program, the Social Security Administration will be forced to cut benefits by roughly 23% starting 2034.
Consider this, though. You'll effectively be in the same spot as if Congress raised the full retirement age to 70 years old with the added flexibility of taking Social Security benefits earlier if you have to.
The best thing you can do to protect yourself from a cut to Social Security benefits is to save more in your retirement accounts. If you can move from the 82% of current workers expecting to rely on Social Security to make ends meet in retirement to the 18% that can survive without it, you'll be in an incredible position. Social Security benefits become icing on the cake at that point.
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