More than doubling the federal minimum wage is quite the controversial proposal currently sitting in Congress, but there’s no debate about one facet of the concept: doing so would boost Americans’ retirement savings.
The House of Representatives recently passed the Raise the Wage Act, which would increase the minimum wage across the country from $7.25 to $15 an hour by 2025. The bill still needs to get approved in the Senate and then by the president, but if it were to pass as is — or somewhat similar to its current form — it could mean adding thousands of dollars to many American’s retirement income.
Higher wages would allow workers to put more of their money in a retirement account, even if it was still a low percentage of their salaries (say 3%, which is a typical rate companies use to automatically enroll new hires). But the impact of raising the minimum wage goes beyond an individual’s own savings rate and affects other aspects of retirement planning — especially Social Security.
When there’s wage growth among people who make less than $132,900, the current payroll tax cap, the Social Security Administration brings in a lot more money, said Monique Morrissey, an economist at the Economic Policy Institute. The program relies heavily on payroll taxes and any excess revenue not going toward current retirees’ benefits would go toward the trust funds that support Social Security instead. When wage growth happens above the cap, it doesn’t do much for the program because earnings over $132,900 aren’t taxed for Social Security benefits. (Millionaires typically stop paying their share of the taxes that go toward Social Security by mid-February — one reason why some Democratic politicians are proposing to raise or eliminate the cap altogether).
The Social Security system, as it stands, needs help. If nothing about it is changed soon, the trust funds attached to the program will be depleted by 2035, and retirees will receive about 80% of the benefits they’re owed, according to a Social Security Administration trustees’ report from earlier this year. Social Security is paid out of current tax revenue, but the trust funds are meant to fill any gaps year to year, Morrissey said. A cut in benefits would be detrimental to many Americans, some of whom rely on the program for 90% of their retirement income, and even more of whom rely on it for half, studies have found.
If a single worker with a life expectancy of 90 were to earn the current minimum wage her whole life, and claimed Social Security benefits at her full retirement age, she would receive a monthly benefit of $924, compared with that same type of worker earning $15 an hour, who would receive $1,337, said Bill Meyer, chief executive officer of software firm Social Security Solutions.
But Social Security benefits can also be calculated cumulatively — that is, the total amount in one’s lifetime. Cumulatively, a worker claiming at 62 after having earned the current minimum wage his whole life would receive $294,000 (assuming a 2% cost-of-living adjustment), and $398,000 if he claimed at 70. But if a worker earned $15 an hour and claimed at 62, he would see $425,000 in lifetime Social Security benefits, and $576,000 if he claimed at 70.
Of course, there are critics who argue such a dramatic jump for minimum wage could have undesirable consequences as well. Some companies may let workers go or restrict hiring because of the extra costs associated with workers’ higher wages, they argue. A 2016 University of California, San Diego study found the Fair Minimum Wage Act of 2007, which bumped the rate from $5.15 to $7.25 an hour, had an adverse effect on low-skilled workers’ employment. A recent study from the University of California, Berkeley, however, found it wouldn’t hurt low-income areas and instead would help reduce poverty.
Seattle, which voted in 2014 to gradually raise its minimum wage to $15 per hour, has not seen much negative impact on workers’ employability, and the increase only caused a “modest reduction” in hours worked over the six quarters following the wage increases, according to a report distributed by the National Bureau of Economic Research in October.
In fact, some legislators say $15 an hour is too low. Earlier this week, Rep. Rashida Tlaib, a Democrat from Michigan, suggested boosting the rate to $20 an hour, in an effort to take Americans out of poverty and pay for a rising cost of living. The federal minimum wage was last changed in 2009, up from $6.55 in 2008.