You’re eager to buy your favorite candy bar. You go in the store. You pay the usual amount. But when you open the familiar wrapping you get a terrible surprise. It’s smaller, way smaller, than you expected.
Millions of Americans may have an experience like this in the future. Only it will be with something far more important. The shrunken candy bar will be their Social Security check. Benefits will be far smaller than expected if Social Security is “reformed.” The change would come through a bill submitted by Rep. Sam Johnson, R:Texas.
You would not know this from his press release. It bears a modest title: “Sam Johnson Unveils Plan to Permanently Save Social Security.” The release then describes a series of proposed changes that would make Social Security solvent for 75 years.
This is huge. The 2016 Trustees’ report estimates exhaustion of the trust fund by 2034. Worse, the actuarial deficit over the next 75 years is a whopping 2.66 percent of taxable payroll. Since the employment tax is 12.4 percent, that’s a huge amount. Measured another way; the unfunded liability amounts to $11.4 trillion. Today.
That $11.4 trillion is not on hand. And that’s the candy bar dilemma. The only way to deliver the promised benefits is to increase the tax. The alternative is to shrink the candy bar. That means finding a way to weasel out on promised benefits while continuing to collect the same amount in taxes. Future retirees will pay the same high tax but receive less in benefits.
What a deal.
Cuts to future benefits are not mentioned in the press release. Nor are they mentioned in a supporting document provided by Congressman Johnson’s office. In the glorious tradition of misleading language from our elected leaders, the releases tell us Johnson call for:
- “Modernizing how benefits are calculated.” (Code for reducing the benefit-crediting rate for most workers.)
- “Gradually updating the full retirement age at which workers can claim benefits.” (Code for reducing the benefits for anyone who can’t work as long as we say they should work.)
- And “ensur(ing) benefits keep up with changes in the economy.” (Code for using an inflation measure that reduces the rate of increase in benefits.)
But the truth comes from Stephen C. Goss, the Chief Actuary for Social Security. A 30-page letter from his office provides an item-by-item analysis of the proposed bill. It also gives estimates of how future retiree benefits will compare to those due under current law. Here’s my CliffsNotes summary.
The Social Security Reform Act of 2016 proposes 15 changes in Social Security. Of those, ten have impacts under 0.10 percent of funding. Many are considered “negligible.” The big bucks are in three proposals. One works to change the benefit formula. Another advances the full retirement age. The third changes the method for calculating inflation. Those changes would cut benefits by 2.94 percent of payroll over the next 75 years.
The changes would have no immediate effect. But they would start to bite for workers retiring in 2030 or later. That means workers who are 50 or younger. So, if you’re already retired, you’re safe. But your adult children and grandchildren will see their benefits reduced. Meanwhile they continue to pay employment taxes that support current retirees.
Future retiree benefit cuts depend on their level of lifetime earnings. Here are examples for medium and higher wageworkers retiring in 2030. (Low wageworkers are affected in another way, which I cover next week.)
- A medium wageworker with a 44-year record (one with about $49,000 wages in 2016) will start retirement with an 11.4 percent benefit cut. The cut will increase to 18.8 percent by age 95.
- A high wageworker with a 44-year record (about $78,600 for 2016) will start retirement with a 19.9 percent benefit cut. It will increase to a 26.6 percent cut by age 95.
- A top wageworker with a 44-year record (one earning $118,500 in 2016) will start retirement with a 25.2 percent cut. It will increase to a 65.4 percent cut by age 95.
Benefit cuts increase each year after 2030. A 33-year-old medium wageworker today would experience a benefit cut of 33.2 percent when retiring in 2050. That cut would increase to 34.1 percent by the time they reached age 95.
Bottom line: This would be a good time to make certain that your members of Congress read more than press releases. The chief actuaries’ letter is a good start.
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.