I have some advice for our new Republican leadership: Remember Dan Rostenkowski. He was the chairman of House Ways and Means Committee in 1989. Angry senior citizens surrounded and nearly attacked him for the Catastrophic Coverage Act.
A far larger issue is at hand for 2017, which promises to be a watershed year for the American middle class. Rep. Sam Johnson, R-Texas, introduced the Social Security Reform Act of 2016. The bill foreshadowed this years' biggest debate.
The reintroduction of that bill will test the reading and listening skills of all Americans. It makes a huge promise. It offers to make Social Security solvent for the next 75 years without increasing taxes. It would do this by cutting $11.6 trillion in promised benefits.
Don’t expect the politicians to discuss what they are doing as benefit cuts. Instead, they will call it “reforming” and “modernizing.” But the actual event will be to cut $11.6 trillion of benefits that future retirees expect. This, they say, will bring the system into “balance.”
Workers with average and higher earnings can expect big cuts. The benefits lower wageworkers can expect appear to be higher. The bill redistributes the benefits workers with earnings of $49,121 to $118,500 will lose to workers with wages under $49,121 a year.
But the operative word here is “appears.”
According to an analysis from the office of the Chief Actuary for Social Security, the reduction in benefits for workers with average and above wages can be severe. And the bite will get worse year by year.
Consider these examples. A worker who is 52 this year with earnings of $78,594 would retire at 65 in 2030. She would lose 19.9 percent of benefits to start. The loss would deepen year by year, until 26.6 percent of benefits were lost at age 95.
A worker who is 32 this year would retire at 65 in 2050. He would lose 33.2 percent of expected benefits to start, growing to a whopping 69.1 percent by age 95.
But both workers would continue to pay the same level of employment taxes. So the benefit changes function as a sly graduated tax on younger workers.
On the surface, lower than average wageworkers get a better deal. A worker earning $22,105 this year and retiring in 2030 at 65 could expect to have a 4.5 percent boost in benefits. A younger worker retiring at 65 in 2050 could expect a 10.1 percent boost in benefits.
So there’s still a “social safety net” for those who earn less, right?
Sorry, that’s not likely. The reality is that lower wageworkers are more likely to retire and claim benefits well before age 65.
This isn’t irrational or self-destructive. Many claim benefits early because their job has disappeared, or they are no longer capable of doing the hard physical work many low wage jobs require. Workers lose about 8 percent in benefits for each year of early claiming. So it’s not difficult to see that having a 4.5 to 10.1 percent benefit boost is possible on paper--- but unlikely in practice.
Another factor is life expectancy. Those in the top half of the wage distribution tend to live five years longer than those in the bottom half. While higher wageworkers have always had a higher life expectancy, the gap is far larger today than it was just half a century ago. Higher wageworkers may adapt to a higher full retirement age of 69. But a lower wageworker would need to retire at 64 to, on average, collect benefits for the same number of years.
If anyone pays attention, we’re about to see a gigantic collision. The politicians will be talking about Social Security benefits as “entitlements.” It will sound like a form of welfare. They will tell us that those entitlements have grown out of hand.
But here's something I’ve learned from reader letters. Real people don’t like the word “entitlement.” They are the millions who depend on Social Security, who don’t have Congressional pensions. The word offends them. It angers them. They’ve paid employment taxes year after year. In their view, Social Security isn’t an entitlement. It is something they earned.
Next Sunday: Social Security Is the Battleground of the next 15 Years
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.