Richard L. Kaplan, the Peer and Sarah Pedersen Professor of Law at Illinois, is an internationally recognized expert on U.S. tax policy, elder law and retirement issues. In an interview with News Bureau Business and Law Editor Phil Ciciora, Kaplan discusses the various proposals to reform Social Security on its 80th anniversary.
With people living longer, does it make sense to increase the retirement age?
From a political viability perspective, raising the retirement age would likely have bipartisan appeal, simply because it has been done before.
In 1983, President Reagan and the Democrat-controlled Congress did exactly that – they increased the full-retirement age from 65 to 67, but delayed its phase-in period for 18 years. The mechanism is already in the law, so a similar increase would be very easy to implement. The reasoning behind increasing the retirement age is that people are living longer and Social Security was never intended to provide an annuity for 30 years or more. When Social Security was first enacted, the average life expectancy in this country was 61.4 years. So if we were to adjust Social Security’s retirement age for the increase in longevity, the new retirement age would be 82. No one is suggesting that change, but it does show how our perception of Social Security and retirement has evolved since the program’s beginnings.
On the other hand, the increase in life expectancy is not universal. Lower-income, less educated people have generally not experienced as great of an increase as higher-income, more educated people.
A more significant change would be adjusting the age of early retirement. You can start claiming Social Security benefits as early as 62, and most Americans claim retirement benefits prior to reaching full-retirement age. So far, however, no one is really advocating a change to the early retirement age.
Would means-testing help to exclude the rich and ultra-rich from receiving benefits?
Means-testing is another potential solution that polls well, but it goes against the purpose and origin of the Social Security program as social insurance. The idea is that if you pay into the system, you get the benefits you’ve earned, regardless of whether you need those benefits.
If we lowered or even eliminated benefits for people whose income exceeds some designated amount, that would change the essential character of Social Security and make it more like a welfare program, where you get benefits only if you need them.
On the other hand, we already do indirect means-testing by subjecting an increasing proportion of one’s Social Security benefits to income taxation. Moreover, the income thresholds for such taxation have not been adjusted for inflation since they were first enacted, so now almost 1 in 2 retirees pays tax on their benefits.
Would raising the cap on income subject to payroll taxes, as some presidential candidates have suggested, be a path to solvency?
That could be a way of strengthening the program, but only if we didn’t provide retirement benefits based on the income above the earnings cap, which is $118,500 this year. Such a change would alter Social Security’s basic character.
In any case, only about 6 percent of workers earn more than the wage cap. For that reason, raising or eliminating the cap could be characterized as another tax on upper-income workers, which the present Congress is not likely to enact.
What did the latest trustees report tell us about the long-term health of the Social Security program?
The conclusion of the report was unsurprising: Changes need to be made sooner rather than later. But full benefits can be paid, according to the assumptions of the economic prognosticators, until 2033, even if no changes are made at all.
Because the likely changes are some form of a tax increase or a benefit reduction, the political problem is that you’re asking current members of Congress to vote for unpopular changes to solve a problem that won’t even manifest itself for another 18 years. That’s a tough sell.
In fact, a related problem is much more urgent but almost no attention is being paid to it: The separate fund that pays Social Security disability benefits will run short next year, and payments to those beneficiaries will be reduced unless something is done before then. Thus, the prospect of addressing the 2033 shortfall in retirement benefits is not likely to happen anytime soon.