Lawmakers are starting to put forth proposals to head off the funding crisis for Social Security and to educate retirees about ways to optimize their lifetime benefits, but many of those ideas may not be enough.
This month, a bipartisan group offered up changes to the Social Security Administration that they hope would persuade Americans from claiming benefits too early. The legislation is not aimed at fixing the program’s finances, but is an effort to help Americans make better decisions about when to claim their Social Security benefits that could increase their retirement security.
Other ideas floating among senators are increasing the retirement age to claim full benefits from Social Security and altering the formula that calculates a senior’s benefits.
While the some of the proposals may help shore up the entitlement program to some degree for the 67 million Americans per month who receive benefits, they may also unintentionally hurt those least prepared for retirement — lower earners and women — according to experts.
To “avert significant, across-the-board benefit cuts in roughly 10 years, Congress must shore up Social Security’s finances,” Shai Akabas, director of economic policy at the Bipartisan Policy Center, told Yahoo Finance. “They should do so by passing a comprehensive reform package that includes enhanced support for those who most rely on the program for financial security in retirement, which is often those who must claim benefits as soon as they’re eligible.”
Runway to ‘shore up’ Social Security is getting shorter
Right now, the main Social Security trust fund is expected to pay out full benefits through 2034, according to the annual report released last year. There’s expected to be enough payroll taxes coming in for workers to pay out about 80% of scheduled benefits after that milestone. But the runway to make fixes in the system is getting shorter every day.
In fact last week, lawmakers on the Senate’s Finance Committee goaded Treasury Secretary Janet Yellen about the missing plan for Social Security in President Biden’s 2024 budget proposal.
How delaying can help
The case for delaying receiving benefits is gathering steam. “For sure, most people would benefit by filing later than they do,” Mark Miller, a retirement expert and author of Retirement Reboot, told Yahoo Finance. “I think that there’s lots of evidence to support that idea. The vast majority of people have claimed by their full retirement age.”
About half of Americans take Social Security before their full retirement age (FRA), which ranges in age from 66 to 67, according to SSA data. Roughly 15% of men and 14% of women collect at their FRA. And a fraction of men (7.3%) and women (8.2%) wait until age 70.
That timing matters. If you choose to delay getting benefits until age 70, you earn delayed retirement credits, which come to roughly an 8% per year annual increase in your benefit for each year between your full retirement age until you hit 70 when the credits stop accruing.
The lawmakers’ solution? Bring back paper statements from the Social Security Administration to show them how the calculations play out and simplify the vocabulary around claiming ages, so people don’t get confused.
“A widespread lack of knowledge about Social Security benefits and claiming strategies leads to suboptimal decision making,” Catherine Collinson, CEO and president of the nonprofit Transamerica Institute and Transamerica Center for Retirement Studies, told Yahoo Finance. “Educational efforts are desperately needed to help people make informed decisions about when and how to claim Social Security including the implications and trade-offs involved.”
Why people can’t wait
That said, “not everyone has the luxury of deciding when to claim Social Security benefits. For some, the choice is made for them, due to financial stresses or health care needs,” Akabas said. “Notably, these challenges are faced more often by people of color and those with less education.”
Consider this: the median 401(k)/IRA account balance for working households approaching retirement (ages 55–64) was $144,000 in 2019, which could dole out slightly more than $500 per month in income during retirement, according to researchers from the Center for Retirement Research at Boston College.
For lower-income households that are less likely to have access to retirement savings plans through their employers, the retirement readiness gap is even more grim: The median account balance is only $32,200 for those who do have a 401(k).
“Decisions about retirement assume a freedom to retire or work as someone pleases,” Teresa Ghilarducci, a professor of economics and policy analysis at the New School for Social Research, told Yahoo Finance. “Most people retire before they are ready because of being pushed out, laid off, forced out because of health, or to take care of a spouse or parent.”
And that dovetails with the shortcomings of the other Social Security proposals that are being kicked around on Capitol Hill.
Cassidy and Sen. Angus King (I-Maine) are reportedly proposing the idea of raising the full retirement age to 70 from 67, while others are putting forward the concept of changing the way the benefits formula works for Social Security by using the number of years working and paying into the program instead of the current average earnings over 35 years.
The possibility of raising the full retirement age to 70 as Cassidy and King reportedly are knocking around, however, ignores the reality that while current workers anticipate they will retire at 66, according to Gallup’s annual Economy and Personal Finance survey, the average retirement age is currently 61. Over the years, retirees’ reported retirement age has been about five years younger than non-retirees’ expected retirement age, according to the researchers.
That’s largely because life events dictate retirement age for many.
More than half of retirees (54%) said a health problem, caretaking responsibilities for a family member, or forced retirement or unavailable work played a factor in their decision to retire, according to Federal Reserve data. That jibes with other recent research.
Of the nearly half of retirees who retired earlier than they expected in the 2022 annual survey by the Employee Benefit Research Institute (EBRI) and Greenwald Research, two-thirds report their early retirement was for a reason out of their control.
So jacking up the full retirement age is going to force people to take lower Social Security benefits likely at a time when they weren’t financially prepared to retire.
The other stark reality is that people, particularly women, tend to step out of the workforce earlier than planned due to a health issue or caring for an aging relative or partner takes precedence. Then too, ageism is ingrained into our workplace culture and many older workers are phased out or pushed into retirement by their employer.
And since women are more likely to take time off work for caretaking — both for children and aging relatives — and have longer life spans than their male counterparts, changing the Social Security benefits wage formula that some Washington lawmakers are mulling could affect them most.
The lifetime earnings of a mother with one child, for instance, are 28% less than the earnings of a childless woman, and each additional child decreases a mother’s lifetime earnings by another 3%, according to the Census Bureau’s Supplemental Poverty Measure (SPM).
Moreover, more than two-thirds of caregivers for older adults in this country were female — either wives, daughters, or other family members. And 3 in 5 caregivers report having to make employment changes as a result of caregiving, the Census Bureau found.
“Higher retirement ages and the change in the wage formula, both are ways to cut benefits across the board,” Miller said. “You’re talking about women who take time out of the workforce, and it’s going to disproportionately impact them. This is one of the reasons why I generally am not in favor of things like this because they’re blunt instruments.”
“What this does is that it drags down benefits for workers who have fewer than 40 years of work and also for those who have very low earnings in some of those years,” he added. “We’re encouraging everybody to work longer. That’s the policy justification for the change. But it’s just a way to cut benefits and it’s unfair and hits the people who need the money the most.”