Retirement Age Increase or Higher Taxes? What You Need to Know About The Reform of Social Security

French workers are flocking to the streets to protest President Emmanuel Macron’s pension reforms, which include an increase from 62 to 64 years old for the country mandatory retirement age. There were protests last week with over a million people in attendance, waste has piled up since trash collectors are on strike, and public transportation has been severely impacted.

At the same time, some US lawmakers are advocating for a higher retirement age as part of a package of changes to federal and state entitlement programs.

The trust funds that compensate for retirement benefits are expected to go insolvent around 2032, so lawmakers have a deadline. That wouldn’t necessarily mean a complete system collapse, but it could cause a 20% reduction in benefits for everyone.

According to Alicia Munnell, director of Boston College’s Center for Retirement Research, these reductions would impact current and future beneficiaries.

Why do we need to change Social Security?

With a decreasing birthrate and an aging population, fewer working-age Americans are paying into the Social Security system to support retirees.

To some Republicans, the answer lies in increasing the age at which people can retire in its entirety. However, legislation to implement the Republican Study Committee’s proposal to increase the eligibility age, including Medicare and Social Security, has not yet been introduced.

Former South Carolina governor and 2024 hopeful Nikki Haley has publicly stated her support for increasing the retirement age for Those in their twenties. Louisiana Senator John Kennedy and South Carolina Representative Nancy Mace are just two Republicans who have called for a discussion on increasing the retirement age for the younger generations.

When can you officially retire?

Currently, persons can retire with reduced benefits as early as age 62. Although the “full retirement age” for people born in 1960 or later is 67, the maximum benefits paid via Delayed Retirement Credit do not kick in until age 70.

Some rules, such as reducing payments for widows and spouses if claimed before the threshold, are tied to the full retirement age.

Raising the full retirement age could still result in benefit cuts for retirees, even though the term is misleading because it is not tied to the official retirement age.

The Center on Budget and Policy Priorities, a nonpartisan think tank, estimates that a 20% reduction in benefits would result from raising the full retirement age to 70.

Workers in physically demanding professions are more inclined to retire early and accept a benefit cut than their white-collar counterparts, which may be able to work for another two or three years before retiring. That decrease would be considerably more pronounced if the retirement age were raised.

Those who begin receiving Social Security at age 62 earn 70% of the amount they would have received had they started receiving benefits at age 67. According to Munnell, workers would only receive 55% of the retirement age benefits to return to 70.

Option 2: Raise the amount of money being made

The legislature could also increase funding for Social Security.

Increasing the payroll tax is an idea being considered by some. The current tax rate is 6.2% for employees and employers or 12.4% for self-employed individuals on wages up to $160,200.

Last month, Senators Elizabeth Warren and Bernie Sanders submitted a bill to expand the payroll tax to include incomes above $250,000.

According to Mark Iwry, a nonresident senior scholar at the Brookings Institution and a former senior adviser to the Secretary of the Treasury, raising the tax rate on businesses and workers is another possibility.

Iwry pointed out that raising taxes for Social Security might make it harder to raise taxes for other, equally important reasons, such as Medicare, foreign issues like Russia’s war in Ukraine, or climate change.

But, there is fear that investing even a portion of Social Security reserves in private-sector equities and bonds, which have a history of producing more substantial long-term outcomes, could lead to a reduction in payouts in the event of a market crash.

The Bottom Line

Iwry argued that politicians should go to work on the matter as soon as possible, even if benefit cuts are unlikely to happen this decade.

Craig Copeland, the Employee Benefit Research Institute, says that people in their thirties and younger should plan for retirement even though they may not yet consider the changes coming to Social Security.

This may entail working past the traditional retirement age, saving more money, or “phasing through” retirement by working part-time.