Introduction: Two United States senators, Angus King of Maine, and Bill Cassidy of Louisiana, have announced plans to create a Social Security reform package. The preliminary discussion of their plan stresses two changes to the current system, an increase in the full retirement age from the current age of 67 to age 70, and the creation of a sovereign wealth fund that would invest resources for Social Security in equities.
The primary reason for the Social Security reform proposal is to prevent automatic reductions in Social Security benefits after depletion of Trust Fund assets. The trustees of the Social Security trust fund believe these automatic benefit cuts could start in 2033.
The purpose of this post is to provide a quick impression of the admittedly preliminary Cassidy/King proposal.
Comment One: The articles and the press releases pertaining to this preliminary proposal do not contain or refer to an explicit analysis of the impact of the policy change on benefits. However, the headline of the yahoo new article “Under latest social security reform proposal millions receive more and no one receives less” appears misleading.
An increase in the full retirement age to 70 and the retention of 62 as the early retirement age would lead to a decrease in benefits for everyone with the exception of people who retire at age 62. The combination of a change in the retirement age and no change to the minimum age for retirement will also reduce the incentive for older people to remain in the workforce and/or delay claiming their Social Security benefit.
The current full retirement age for people born after 1960 is 67 and under current law people born after 1960 will receive a 30 percent decrease in the retirement benefit and a 35 percent reduction in the spouse’s benefit if they retire at age 62 instead of age 67.
This publication from the Social Security Administration reveals that under current law a person eligible for a $1,000 benefit at the full retirement age will receive $700 if she retires at age 62 and $1,240 if she retires at age 70.
An increase in the full retirement age to 70 would reduce the benefit at age 70 to $1,000, which is a 24 percent reduction in benefits.
Under current law, a person born after 1960 gets an annual increase in benefits of 7.4 percent for each year of delaying claiming Social Security between age 62 and 67.
The annual increase in benefits under Cassidy/King is 4.6 percent.
This means a person retiring at age 67 under Cassidy King would get an annual benefit of $875.
The Cassidy/King proposal (or at least my understanding of it) would result in a 12.5 percent in reduction for benefits for the person retiring at age 67.
Comment Two: The final Cassidy/King plan could also include other modifications to the benefit formula, specifically a change in the number of years worked on final benefits. This change could offset benefit cuts from the change in the full retirement age for some workers and augment it for other workers. An analysis of policy change would require information on past lifetime work histories and might require assumptions on how the policy change impacts retirement and workforce participation.
Comment Three: Most politicians advocating Social Security reform stress that their plan should not adversely impact benefits of people nearing retirement. An abrupt change in the full retirement age would abruptly change benefits. The Cassidy/King proposal would have to be phased in to avoid abrupt benefit changes, however,a gradual phase in would not avoid the projected mandatory 2033 benefit reductions described here.
Comment Four: Alicia Munnell points out that the Cassidy/king proposal for the creation of a sovereign wealth fund to increase returns and decrease cost of funding Social Security cannot be achieved by diverting funds from the current trust fund, which is nearing its depletion date. Any diversion of funds from the trust fund would speed up the date of automatic benefit cuts.
Concluding Thoughts: Any viable Security reform that deals with the impending automatic benefit cuts without reducing benefits for people nearing retirement will have to include both new revenue and gradual alterations to the benefit formula. Plans for Social Security reform should also account for the fact that young adults are, for a variety of reasons, not saving enough for retirement. Go here for an article on the need for linking Social Security reform to policies that would increase savings by young adults.