Congress has approved several new laws impacting employer-sponsored 401(k) plans but still hasn’t addressed Social Security, which the government says will run out of money by 2033 if nothing is done.
People are living longer and drawing benefits longer than anticipated when the law was enacted in 1935 when the average US lifespan was 61 for men and 65 for women. A male born today is expected to live till 74.5; a female until 80.2.
A current proposal by a bipartisan group of US senators, led by Maine independent Angus King and Republican Bill Cassidy of Louisiana, is among several efforts to overhaul Social Security. It would, among other things, increase the age for receiving full benefits to 70. That is expected to face stiff opposition in Congress and among senior advocacy groups.
The two senators have also proposed creating a sovereign-wealth fund that could be funded with $1.5 trillion or more in borrowed money. If the fund fails to generate an 8% annual return, both the maximum taxable income and the payroll tax rate would be increased to ensure Social Security stays on track to be solvent for another 75 years.
Other options on the table include changing the formula that calculates monthly Social Security benefits from one based on a worker’s average earnings over 35 years to a formula based on the number of years spent working and paying into Social Security.
A similar change is already being considered in France. The initial reaction by the public there is riots and protests because individuals work hard, starting at 18, and expect a certain benefit to happen that they were promised. But now the government is talking about raising the age or cutting the benefits.”
Currently Americans can take early benefits at 62, but the full retirement age is 66 or 67, depending on the month and year of your birth.
“There is no painless way to get around this,” says Denis Poljak, partner, managing director at Poljak Group Wealth Management in Shreveport, Louisiana. “I think this is going to affect everyone, but it’s one of those necessary evils that needs to be done in order to keep the system solvent.”
Here’s a look at the impact of raising the retirement age to 70:
- Retirees already receiving Social Security benefits should not be affected.
- Those who take benefits early would be impacted the most.
- It might encourage people with high 401(k) balances to take RMD earlier.
- It’s unclear what may change for those who wait until 70 to get a bigger check.
- Retirement income planning would become even more critical for retirees.
- A third of recipients take Social Security early at 62, according to the Social Security Administration, and about half take benefits before full retirement age. They are likely facing the biggest changes.
- Moving the full retirement age to 70 would also very likely increase the early retirement age, possibly to 65. It also means that more workers would likely die before they qualify.
- Those who take Social Security benefits at age 62 lock in monthly benefits of 30% less than if they waited until full retirement age. Waiting until 70 means benefits would increase another 8% annually from full retirement age.
- For people who had these aspirations of retiring as early as possible or having a little bit more free time, a little bit more supplemental income, their plans will be greatly affected. They’re going to have to continue to work for another three years, depending on what their health is — or have to go without, and that’s even a worse scenario.
- Only 5% of men and 7% of women wait until age 70 to take Social Security benefits.
For the people who were working or did not need the income, working longer always made sense. It made sense for them to delay Social Security to 70 because they would get an annual increase of 8% in the benefits.
But If the normal retirement age becomes 70, in the end, this will really affect the people who need the money at 62 or people who were planning to retire earlier than 70. And as noted above, that’s over 90% of men and women. So, we’re talking a huge change here!
But Cassidy and King claim their plan doesn’t include any cuts for Americans currently receiving Social Security benefits, and that “many will receive additional benefits.”
Social Security advocates aren’t buying this and many lawmakers have pushed back against raising the full retirement age because of the potential financial impact it would have on seniors who are already struggling to make ends meet.
The bottom line is: The idea behind raising the full retirement age is that it will push more Americans to wait an extra couple of years to start claiming Social Security benefits. So far, the idea has not advanced much past the discussion stage. The King-Cassidy initiative represents a much more concrete step toward bringing such a plan up for a Congressional vote.
This will be an interesting one to watch.
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