The stock market crash of 1929 and the subsequent Great Depression left many elderly Americans in poverty. In fact, more than half of seniors lacked the necessary income to support themselves in 1934, prompting a number of states to implement old-age pension programs. But those state-run systems were largely ineffective, and most of them disappeared quickly when the Social Security Act was signed into law in 1935.
Today, 88% of Americans 65 years of age and older receive Social Security benefits, and more than half of retirees say those benefits represent a major source of income. Unfortunately, while the program has undoubtedly kept many seniors out of poverty, the Social Security program is in need of reform.
Here are three big changes proposed by various politicians in Washington.
1. Apply Social Security payroll tax to more income
Falling birthrates and longer life expectancy have created a problem for the Social Security program, as beneficiaries represent a slightly larger portion of the total population each year. In fact, the worker-to-beneficiary ratio currently sits at 2.8, down from 5.1 in 1960, and that figure is expected to fall to 2.3 by 2035. In other words, the number of workers who pay taxes into the Social Security program is shrinking in comparison to the number of seniors that are receiving benefits. That trend in unsustainable.
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With that in mind, the Social Security Board of Trustees estimates the Old-Age and Survivors Insurance (OASI) trust fund -- which funds retirement and survivors benefits -- will run dry by 2034. At that point, the program would rely entirely on tax income, but taxes would only cover 77% of scheduled benefits in 2034, according to the trustees.
Earlier this year, Sen. Bernie Sanders (I-Vt.) and Rep. Peter DeFazio (D-Ore.) introduced a potential solution: the Social Security Expansion Act. Among other changes, the bill would apply Social Security payroll tax to all income above $250,000, a dramatic deviation from the current system, which caps maximum taxable earnings at $147,000. The Social Security Expansion Act would also tax the investments and business income of millionaires and billionaires to further boost funding for the program.
Collectively, those changes would extend the solvency of the OASI trust fund for an estimated 75 years, while boosting Social Security benefits by an estimated $2,400 per year.
2. Revise the formula used to calculate COLAs
Since 1975, cost-of-living adjustments (COLAs) have been used to keep Social Security benefits in line with inflation. Those COLAs are currently based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a metric based on purchases made by office workers and other wage earners. Unfortunately, the CPI-W is a poor approximation for the spending patterns of seniors.
Specifically, seniors tend to spend more on medical care, prescription drugs, and housing, while working-age individuals spend more on education, apparel, and transportation. That means the CPI-W underemphasizes the spending categories that are most relevant to seniors, and that has caused Social Security benefits to lose 40% of their buying power in the last two decades, according to The Senior Citizens League.
The Social Security Expansion Act includes a provision to address that issue. The bill stipulates that inflation would be measured using the Consumer Price Index for the Elderly (CPI-E), a metric based on purchases made by individuals 62 and older.
For context, The Senior Citizens League estimates that the CPI-E on average outpaces the CPI-W by two-tenths of a percentage point, and while that may seem like a small number, the power of compounding would make it quite significant over time. For instance, if COLAs had been calculated using the CPI-E over the last two decades, the average retired worker would have received an extra $5,800 in retirement benefits.
3. Boost payments to long-lived beneficiaries
Seniors tend to incur greater expenses as they age, especially where medical care and prescription drugs are concerned. To that end, President Joe Biden has proposed increasing the Social Security income paid to long-lived beneficiaries. His plan would boost benefits by 1% annually for seniors between the ages of 78 and 82, resulting in a cumulative increase of 5% for individuals who have received retirement benefits for 20 years.
None of the revisions discussed in this article have yet been implemented, but seniors should make a point of staying informed on potential changes to the Social Security program as they could dramatically impact financial well-being.
