Raising the Retirement Age for Younger Workers Is the 'Most Likely' Social Security Fix

Even though politicians from both parties have assured Americans that the retirement age won't be lifted, from a financial planning perspective, you may be better off tuning them out.

Here’s a rule of thumb to consider: If you’re in your 40s, plan for the retirement age — which is currently 67 — to be one year higher by the time you retire. Tack on two years if you’re in your 20s.

At least, that’s the recommendation in a new white paper analyzing the looming Social Security funding shortfall by HealthView Services, a company that offers software for financial advisors.

The phrase "retirement age" refers to the age when someone is eligible to receive full Social Security benefits. You can currently claim benefits as early as 62, but your payouts will be reduced if you claim before 67.

It's an especially hot topic heading into the November election. Vice President Kamala Harris and former President Donald Trump have said they won't cut Social Security benefits and seem opposed to touching the retirement age. But one way or another, Congress is going to have to shore up the program’s trust funds, which are on track to be depleted in roughly the next decade. Barring a legislative solution, benefits would automatically be cut by 21% in 2033, affecting current and future beneficiaries.

The idea of an overnight cut of that size is intolerable to almost everyone. For context, it would result in a roughly $250,000 reduction in lifetime payments for the average couple 10 years away from retiring.

So, how could legislators fix Social Security? The white paper, released Tuesday, analyzes seven other possible courses of action and breaks down how much of the funding shortfall each would address. A few examples:

• Ending the maximum taxable earnings limit on payroll taxes for high earners would eliminate 70% of the shortfall;
• Reducing annual cost-of-living adjustments (COLAs) by 0.5% would eliminate 28%;
• And increasing the payroll tax from 6.2% to 8% for employees and employers would eliminate it entirely.

Raising the retirement age by a year would only eliminate 15% of the shortfall, assuming gradual increases to the retirement age starting in 2040. Although it may seem surprising that such a drastic change would only put a dent in the problem, the challenge with lifting the retirement age is the effects won't materialize until people age into retirement — something that's years away.

In contrast, altering the tax code or limiting COLAs for all beneficiaries would produce more immediate effects.

Will Congress actually raise the retirement age?

HealthView Services CEO Ron Mastrogiovanni says history is the best indication that lawmakers will increase the retirement age when push comes to shove, noting that the retirement age was gradually raised to 67 under legislation passed in 1983 that affected individuals born in 1960 or later.

"[When] the trust fund ran into a deficit, the first thing that the elected officials did was push out the full retirement age for Social Security, and it seems like that's the most likely scenario," Mastrogiovanni says. "It can't be the only thing: When you look at the numbers here, they have to do more than that, but that's one that is most likely to take place."

People ages 40 and under are more likely to be affected by a change to the retirement age, the main reason being that Congress would need to give people time to adjust their retirement plans in response. A recent House Republican budget proposal did call for "modest adjustments" to the retirement age but made clear it wouldn't affect people who are already near retirement.

For younger Americans, though, Mastrogiovanni says to be realistic about the math problem Congress is facing as people are living longer and using benefits for a longer period of time. Some changes that will negatively affect benefits are likely coming.

That's why he says to follow the rule of thumb about assuming a higher retirement age. If the retirement age does go up, you have options: You could either wait longer to claim benefits or take them at 67 and simply deal with the penalty.

What matters is that your retirement planning takes these realities into account.

"It would be prudent for clients to plan on paying more into the system while working and receiving modestly lower benefits in retirement," the paper reads. "Modest additional contributions to retirement savings will go a long way to future-proofing retirement plans based on lifetime Social Security benefits being lower than they are today — but not dramatically so."

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