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Retirement: When Social Security doesn’t feel so secure

Over the past few months, labor unions all throughout France have gone on strike, protested, and held demonstrations over President Emmanuel Macron’s new law to overhaul pension plans that raises the legal age of retirement from 62 to 64. It’s safe to say that workers are livid.

With this international story as inspiration, let’s talk a little bit about retirement in the U.S. and how the French protests mirror a similar debate about Social Security that’s intensifying ahead of the 2024 election. Next week, we’ll go a little further and talk about private pension funds and how they differ.

When can you receive Social Security in the U.S.?

The Social Security system was established in 1935 to create a social insurance program for those 65 and older to ensure economic security for all citizens even into retirement. Interestingly enough, the Social Security Act is what created Social Security Numbers and is why every U.S. citizen receives one today. Quite a number of changes were made before the first payments went out to recipients in 1940 and the program has continued to be adapted and changed over the years.

Similar to the current situation in France, the retirement age for Social Security was increased by two years from 65 to 67 through an amendment in 1983. The change didn’t happen immediately and was phased in over a 22-year period and only applies to citizens born after 1960 (see chart below). In contrast, France’s two-year increase will be implemented in seven years, a much shorter time period.

Special note: The retirement age of 67 is the requirement for an individual to receive full benefits, however, individuals can start receiving reduced benefits at 62. Here’s a chart to help understand reduced benefits.

Who pays for it?

Most people know that Social Security is financed through a payroll tax, but you might not know that BOTH employees and employers pay 6.2% of wages while self-employed individuals pay the full 12.4% themselves. Additionally, wages are only taxed for Social Security up to $160,200 this year, which increased from $147,000 in 2022. That maximum amount is adjusted with changes in average wages and the full benefit amount is calculated using these levels. View the national average wage index and how it is calculated here.

The problem is that the number of citizens retiring is starting to surpass the number of workers currently in the labor market, which means there may not be enough money to support the next generation of retirees. Current estimates suggest that the system will be unable to pay out full benefits by 2035. That isn’t a lot of time to make changes.

How does this impact business?

Proposals by members of Congress to raise the retirement age to 70 have been proposed in the last year along with some calls to phase the program out entirely. Raising the age could mean many citizens delaying retirement a few more years and thus remaining in the labor force. If benefits were to be reduced or phased out entirely, it could leave many older citizens unable to pay bills or to be more selective on where to spend their money, impacting a lot of businesses indirectly.

Those opposed to removing Social Security have proposed alternative ways to fund the program by increasing the tax rate, recalculating the annual cost of living that is factored into the payout formula, taxing other work benefits and even taxing or reducing benefits for the wealthy. 

The impact of what happens with Social Security will impact businesses and is a topic worth paying attention to. Be sure to check your inbox next week when we discuss private pension funds and how they too, impact business.

Author

  • Julianne Culey

    Julianne is the Assistant Director of the Reynolds Center with expertise in marketing and communications and holds a master's in Sociology from Arizona State University.

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