Are Rubio’s retirement reforms right?News added by Benefits Pro on June 10, 2014

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By Chuck Epstein

Sen. Marco Rubio, the Florida Republican considering a 2016 presidential run, made headlines this spring by proposing a five-point, Social Security-focused reform plan.

The last time Congress made changes to Social Security was 30 years ago, so Rubio’s plan helped to fuel an emotional and complex national debate, although nothing he proposed is viewed as exactly breakthrough.

Despite his conservative credentials, Rubio’s plan also ran into trouble in the employee benefits industry. Some called his plan a “gimmick,” while others noted it would do nothing to help replenish the Social Security Trust Fund.

Here are the five main points in Rubio’s proposal:
  • Raise the retirement age;
  • reduce benefits for wealthy seniors;
  • eliminate payroll taxes for older workers;
  • eliminate the earnings test for early retirees, and;
  • open the Federal Thrift Savings Plan (FTSP) to workers who do not have an employer-sponsored retirement plan. The FTSP is the low-fee 401(k) plan retirement plan available to members of Congress and is the largest in the U.S. by assets with $394 billion as of Dec. 21, 2013.
In part, what made Rubio’s plan less-than-appealing from a Republican perspective is that it did not include a proposal to privatize Social Security, a goal which has been espoused by members of the GOP for years, most prominently by President George W. Bush in 2004.

Rubio’s plan also did not include the elimination of the long-debated Social Security payroll tax. Currently, there is a $113,700 cap on income subject to the Social Security payroll tax. Eliminating the cap, according to some estimates, could wipe out at least 60 percent of the Social Security deficit.

In short, there are plenty of doubters out there. Still, some of what Rubio proposed does seem promising. Here's a closer look at his ideas and some of the reaction they elicited from industry observers, policy wonks and others across the political spectrum.
Raising the retirement age

This is one of those notions that many view as inevitable, based on people’s increasing longevity.

In the early days of Social Security, a 65-year-old was expected to live 14 years beyond retirement. Someone who’s 65 today can expect to live 20 more years. Over the years, Congress has increased Social Security’s full retirement age by only two years, from 65 to 67.

The retirement age under Rubio’s plan would stay the same for those 55 and older. But for younger workers, the retirement age would gradually increase, though Rubio did not provide details as to how high he would raise it.

“The system cannot support people who live as many retirement years as they do working years,” notes Jack Waymire, founder of California-based Paladin Research and Registry. The idea of reducing payments to people who don’t need the money also “sounds good” to Waymire, but he then raised the question: “How do you deduct money from their paychecks for 40 years and not pay them benefits after they retire?”

Expecting Americans to work longer before they can start to collect benefits raised a red flag to Alan Barber of the left-leaning Washington, D.C.-based Center for Economic Policy and Research.

His reason: the majority of Americans who depend on Social Security as their main source of income are also the same people who work in physically demanding jobs.

“Increasing the retirement age more than already planned would place additional hardships on these future beneficiaries but would still fall short of ensuring full solvency over the long-term,” Barber said.

That’s pretty much what Lawrence Kotlikoff, professor of economics at Boston University, says in his book, The Coming Generational Storm.

“Sadly, delayed retirement has a negligible effect” on improving the financial security of retirees, he writes. The reason is that workers who delay retirement “often save less because they (plan to) have fewer retirement years to finance,” he added.

That doesn’t sway the folks at the conservative Heritage Foundation, which notes change is needed if only because “Americans live and draw benefits for much longer than ever before.”

The organization thinks Social Security’s full retirement age should at least be increased to 68 by 2024 and that the early retirement age should shift to 65 by 2032. “Then both should be indexed to changes in longevity,” it says, “so that Social Security’s eligibility age keeps pace with future life expectancy.”
COLAs and taxes

This idea also unsurprisingly drew fire from Barber, though mostly because it lacked details. “Simply cutting the COLAs for wealthier Americans is basically lip-service as the (Rubio) proposal does not define ‘wealthier,’” he complained.

“It could easily refer to beneficiaries with a pre-retirement incomes of $50,000 annually or $350,000 annually. This is important because the total savings become smaller at the upper bound of this range because it is a smaller and smaller pool and its impact would be negligible.”

Barber said rather than making changes to COLA formulas, it would be better to eliminate the Social Security payroll tax cap entirely, because doing so “would further strengthen the program and ensure close to full benefits for the foreseeable future.”

Workers pay a 6.2 percent payroll tax into the Social Security system on all earnings up to the earnings cap. Employers pay the same amount on each employee.

Means testing

Today, anyone who claims Social Security before their full retirement age but keeps working is subject to a “Retirement Earnings Test” that reduces benefits.

Rubio thinks the test actually discourages seniors from staying in the workforce and wants to eliminate it.

Rubio’s proposal “heads in the right direction,” the Heritage Foundation said, “but Rubio should go even further by making Social Security into real insurance that protects against poverty in old age.”

The organization has proposes a flat benefit level “well above the federal poverty limit that would phase out at very high levels of income.”

Such a change, it says, would give Americans certainty about what they can expect from Social Security, and together with reforms to encourage higher levels of personal savings, would allow more Americans “to provide a greater portion of their income in retirement through their own efforts.”

An opposite view was offered by James Watkins III, CEO-managing member of Georgia-based investment education firm InvestSense, who thinks that a fairness test should be applied to whatever changes are made.

Watkins opposes raising the retirement age, as well as reducing benefits for the wealthy. His reasoning: The wealthy could probably afford a reduction, “but if they contributed, it’s only fair they should be entitled to their contribution, albeit forced contribution.”

Also read: Retirees regret early Social Security benefits

Watkins said he also has never understood the penalty on the elderly who want to continue to contribute to society.

“Therefore, I would be in favor of both the elimination of the earnings test and the payroll tax on elderly. I have personally seen how some elderly are just barely getting by. Why destroy their incentive to improve their living standards?”

Opening the FTSP

This idea gets a positive response from pretty much everyone.

Watkins called it “an excellent idea” and hoped “more pension plans could follow the excellent example set by the FTS because it offers low-cost, diversified, index funds that allow for effective diversification.”

This notion was also endorsed by Kathleen M. McBride, of the Centre for Fiduciary Excellence, who said opening the plan “may be a very good option for many workers.”

She also suggested the “Kid IRA,” which would allow retirement savings to be started at birth with gifts from parents, friends or relatives. Gaining an extra couple of decades of tax-deferred growth would help enormously.”

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