Saving Social Security

Member Group : Lincoln Institute

Reports of labor shortages, particularly in the trades and other high skilled professions, are almost daily occurrences. Virtually every employer that I speak with laments the shortfall. In addition, many business executives are extraordinarily concerned about the pending retirement of so many baby boomers which will further exacerbate the labor shortage.

With the retirement so many workers, the financial condition of Social Security is at the forefront of many seniors’ and legislators’ minds as well. Senior citizens are increasingly concerned about whether they will have sufficient financial resources in retirement to live comfortably in light of skyrocketing costs for long-term care and end-of-life medical costs.

In terms of the labor shortage, it has recently become clear that there are more jobs available then there are people to fill them even though the labor force participation rate is still relatively low. It is also interesting to note that the participation rate for citizens aged 55 and older is increasing very rapidly since the 2008 financial meltdown, partly to help rebuild financial assets lost during the recession.

When considering when to retire one of the major concerns relative to citizens is the impact that that decision has on their retirement planning.

Under current federal law, individuals who retire at age 62 and start drawing Social Security will see a reduction in benefits due to the early retirement. The following statement is a summary for those age 62 or above until they reach full social security retirement age.

“you claim benefits before your full retirement age, your benefits are reduced a fraction of a percent for each month before your full retirement age. If you also continue to work, your benefits will be reduced if you earn more than the yearly earnings limits. If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2018, that limit is $17,040. In the year you reach full retirement age, we deduct $1 in benefits for every $3 you earn above a different limit. In 2018, the limit on your earnings is $45,360, but we only count earnings before the month you reach your full retirement age.”

The significance of this is that your benefit is reduced since you are taking it earlier than at full retirement age.  Additionally, the benefit is taxable and there is a repayment of your social security benefit based upon earnings in excess of $17,040 (claw back provision). This is punitive at best from a retirement perspective.

Perhaps it is time to rethink Social Security policies.

Reducing the benefit because of drawing it early at age 62 is strictly an actuarial calculation and makes sense. The reduction relates to the present value implications of taking Social Security at age 62 for example versus at full retirement age.

In light of the dire financial condition of Social Security as well as the nation’s significant labor shortage, it would be prudent to eliminate the claw back provision of Social Security for someone working between the ages of 62 and 66.

Additionally, once a taxpayer reaches full Social Security retirement age it would make sense to permit cessation of individual Social Security contributions up to age 70 and eliminate individual Social Security contributions after age 70. The employer portion would still be paid as well as would be the Medicare tax regardless of age by both the employer and employee.

These measures would be designed to allow workers to remain part-time in the workforce beyond a certain age providing some relief to the labor shortage of qualified persons while at the same time providing additional funds to seniors whose long-term care costs have exploded and have become incredibly unpredictable.

When the Social Security measures for early retirement and claw back were first introduced the life expectancy in our nation was significantly lower and long-term care costs were reasonable to accumulate in a lifetime for many workers although not all.

A growing number of seniors are concerned about running out of money in retirement. Once a person retires the ability to reenter the workforce declines. Concurrently, the longer one is in retirement the more perishable the skills for the position that they left during their careers.

Reforming Social Security at the early retirement age of 62 and beyond to make it more attractive to work part-time reduces pressure on seniors for financial planning, lessons impact on their children who are now caregivers, provides for qualified capable workforce in the period of the shortfall of workers, helps to replenish Social Security, and reduces drains on Medicaid should a senior run out of money before they die.

One of the greatest opportunities to restore stability to our workforce and to prevent significant pressures on families in caring for the increasing numbers of seniors involves relatively minor changes to Social Security but a major change in mindset about how qualified seniors can continue to help an economy and society extremely short of qualified workers.

Frank Ryan, CPA, USMCR (Ret) represents the 101st District in the PA House of Representatives.  He is a retired Marine Reserve Colonel, a CPA and specializes in corporate restructuring.  He has served on numerous boards of publicly traded and non-profit organizations.  He can be reached at [email protected].