Senators. Angus King (I-ME) and Bill Cassidy (R-LA) have suggested raising the Social Security retirement age to 70, which would have a devastating impact on beneficiaries, especially those earning lower incomes. Millions of people who pay into Social Security will not stay alive long enough to get benefits if this bill is passed.
Plans to bring Social Security into account balance frequently entail a raise in the age at which workers get full benefits, as was most recently proposed by presidential candidate Nikki Haley.
Legislation adopted four decades ago progressively raises the retirement age to 67. Still, few people know that low-wage individuals are already seeing a drop in their lifetime Social Security income because of this. Even though the full retirement age is increasing by the same amount for all income brackets, the lowest-income retirees will see the most significant reduction in their lifetime retirement income.
Why? Because those who make poor wages tend to have shorter lifespans. Social Security payments are already lower for them compared to the better off. Those with a more inadequate income history may not notice a difference in their monthly payment rate. Still, they would have a far more considerable decrease in their lifetime income due to higher retirement age. The value of their benefits compared to the taxes they paid could be impacted.
Life expectancy has varied dramatically between those with high and low incomes since Social Security was established during the Great Depression. Workers with lesser incomes have seen no improvement in their life expectancy over the past few decades and may even be experiencing a drop. This shift has diminished Social Security’s progressiveness, as I noted in research released by the Society of Actuaries in 2020.
The value of retirement payments for low-income workers will decrease in absolute and relative terms if Congress raises the retirement age again to help restore Social Security’s long-term stability. According to a Congressional Research Service research, policy proposals extending the retirement age will tend to tilt Social Security payouts toward higher incomes because of the growing discrepancy in life expectancy by income.
According to several recent studies, the life expectancy difference between the wealthy and the poor has been widening. The Congressional Budget Office found that in 2014, a guy in the top 20% of lifetime earnings might expect to live more than three years longer than a man in the bottom 20% of revenues of the same age. That chasm will widen to six years by the year 2039. When the National Academy of Sciences compared the birth cohorts of 1930 and 1960 (now aged 93 and 63, respectively), they discovered that the life expectancy of the lowest-income quintile of men at age 50 declined to 26.1 years.
Similarly, men in the highest income quintile had an increase in their life expectancy at age 50. Between the poorest and wealthiest fifth of the population, there was a seven-year widening in the life expectancy gap (from 5.1 to 12.7 years).
The unequal effect of a two-year increase in retirement age is demonstrated through a hypothetical example. Social Security benefits begin at $12,000 for the lower income individual and $36,000 for the higher income worker. Under the new plan, they would miss out on money for 24 months. Low-wage workers will be hit significantly harder, losing 25% of their retirement benefits compared to 14.3% of theirs if the lifespan differential stays the same (six years in this example). The reason is the same: the lesser earner dies earlier on average. Hence their beneficiary receives benefits for a shorter time.
Some researchers predict that widening the longevity gap by three years will result in higher earners receiving 7.1% more in lifetime income than they otherwise would have earned due to their increased life expectancy, more than offsetting the benefit reduction of two years.
The government needs to take action on Social Security’s budget. According to projections made by the Office of the Chief Actuary in 2021, Social Security will require an additional $16.8 trillion in present-value funds to ensure its long-term viability. The longer Congress dithers, the higher the probability that significant changes, such as tax increases, benefit cuts, or a combination thereof, will have profound economic impacts on retirees and workers.
There is a rising disparity between the number of retirees getting benefits and the number of workers paying into the program, which actuaries point to as a severe threat to the program’s ability to pay out promised payments in the future. Yet, there are more factors at play. The revenue base that supports Social Security has been severely weakened by rising wealth and income inequality. The proportion of national income derived from capital investment has grown dramatically as the wealthy accumulate stocks, bonds, and other forms of investment capital. From 1995 and 2013, the share of labor in the United States economy declined by around eight percentage points. As the bulk of Social Security’s funding comes from payroll taxes, the relative increase in capital income has slowly but surely suffocated the program.
Congress may restore Social Security’s tax base by re-establishing and boosting financing contributed by those who profited from decades of growing wealth and income inequities. Increases in Social Security and investment taxes beyond the existing threshold of $160,200 could help stabilize the program. Inheriting investments free of capital gains taxes is a tax loophole that could be closed to increase tax revenue and estate tax.
Congress has already established a precedent by imposing additional Medicare taxes on high earners’ income and capital gains. Those with the most income and assets are the ones who should bear the brunt of any benefit reductions implemented as part of a Social Security rescue plan. There should be a 100% increase in the minimum payout for Social Security and SSI.