If you were ever an excited child in a theme park (or the parent of one), you’ll recall the terror of standing against the “This Tall to Ride” sign. Despite wearing heeled shoes or craning your neck to meet the line, these efforts compounded that deflated joy of simply being too short or too young for the ride.
In the realm of Social Security reform, the “This Tall to Ride” line is similar to “This Old to Retire” or “This Wealthy to Collect.” Because several arbitrary eligibility thresholds have been put into place and unchanged for decades, there is a real need to reform “the line.” To reduce spending and create a modern retirement system, we must responsibly reshape the eligibility criteria for the Social Security program, instead of relying on outdated standards.
An Expanding Tent
First, it’s important to understand why Social Security’s eligibility framework is a problem for the program and spending at large. Imagine a hot day at a town fair. A patriotic vendor in a small carnival tent is selling lemonade and baked goods at a discounted price to military veterans. The vendor running the tent has a very specific customer in mind and wishes to reward them for their service with affordable good eats. At first, only veterans walk into the tent and pay mere nickels for cold beverages and sweet snacks. However, after a while, an older woman walks in who says her husband was a veteran but recently passed away. The vendor welcomes the woman in and allows her to buy the goods at the same discounted rates as the veterans. But then a retired marine walks in with his entire family and asks if he can pay the same rate for his spouse and children as he would pay for himself. The vendor obliges out of respect . As more people become eligible for the discounted food, word has gotten out and the tent completely fills up. So the vendor runs to the store to buy more white tarp and poles to expand the tent to accommodate the crowd.
Despite her best intentions to provide inexpensive refreshments for a very deserving group of folks, the vendor soon realizes that she is running out of coffee and baked goods for her patrons. Unfortunately they must either increase the rates for everyone, start excluding people, or close down the service.
How does this story relate to Social Security? Well, the program started in the 1930’s as a monthly cash benefit for any non-working individual over the age of 65. Because most Americans did not live past the age of 67 in those days, the program was intended to briefly support retirees who no longer had an income.
But as the decades rolled on, eligibility expanded beyond the 65-year-old retiree and included spouses, widows, and children. Then, in the 1960’s, the early retirement age was introduced into the Social Security system that allowed beneficiaries to start collecting at 62. Additionally Americans started living longer (an average of 77 years old today), thus adding unforeseen financial strain to the system. Similar to the tent vendors, Congress had to quickly reform the law in the 1970’s and 80’s to avoid a systematic collapse of a program that millions had come to rely upon.
If the country truly cares about a stable retirement system, then we must correct Social Security for changes in longevity and the modern economy. The program started with 222,000 participants in 1940 and grew to 45 million by 2012. That is a 20,500% increase and is in stark contrast to the 137% increase in the general population over the same time period.
In short, without change, the carnival tent cannot stand.
Who Gets to Ride the Rollercoaster?
In an amusement park, the reason we wait in that zig-zagging line for so long is to be able to sit back and enjoy the ride at the end. The roller coaster (for some) is the most thrilling ride of all. Similarly, retirement is a phase of life most Americans look forward to. After working for decades, there is real excitement about dedicating time to hobbies, seeing friends and family more often, taking trips, and embarking on new ventures. But America is a country of limited resources, and like the manager of a theme park, the Social Security system has to focus on who can participate and for how long, to ensure that everyone gets a fair shot and the program survives.
When discussing eligibility reform that could save money and keep the program intact, one must consider at three key areas:
- The type of citizen who is covered
- The age at which the citizen is allowed to collect
- The amount he or she is allowed to claim
Each area directly affects the number of Americans collecting Social Security at any given time, and by aligning eligibility standards for the 21st Century, we can manage the program’s costs to ensure it stays around for future generations.
Solution #1: Raise the Full Retirement Age
A worker who has been paying into Social Security is eligible to collect 100% of his or her scheduled benefits at the Normal Retirement Age (NRA). Depending on what year a worker was born the NRA ranges from 65 (if born before 1937) to 67 (if born after 1960).
Solution #2: Raise the early retirement age
However, a worker can choose to receive benefits before the NRA at the Earliest Eligibility Age (EEA) at 62. Collecting at the EEA reduces a worker’s monthly benefits by 20% to 30% depending on the year of birth. On the other hand, if a worker delays retirement after the NRA they can receive a monthly increase in their PIA of 3% to 8% depending on their birth year.
Solution #3: Means testing benefits
In the context of Social Security, means testing reduces benefit payments to wealthier Americans based on their non-Social Security retirement income. For example, a retirement income threshold could be set at $50,000 for individuals and $100,000 for couples. For those Americans with retirement income above the thresholds, there would be a benefit reduction.
All means test proposals include a retirement income threshold for individuals and couples, and a percent of benefits are reduced for certain levels above the threshold. A common example is to attach a percent reduction for every $1,000 above the threshold. The more money someone earns during retirement, the less they receive of their scheduled benefit. Without a cap on reduction, a means test could eliminate a very wealthy person’s entire Social Security benefit.
Very few beneficiaries would see reductions, because 75% of benefits are paid to individuals who make less than $20,000 annually, or $40,000 for couples in non-Social Security income. If a means test were applied merely above that threshold, Social Security would be accruing savings on only 25% of beneficiaries. The majority of that 25% are in the middle-income range and would need to be subject to the means test in order to achieve any substantial savings, but means testing offers a practical first step toward savings.