Social Security is arguably the most important program for retirees in this country. As of May 2017, 41.8 million retired workers were receiving a monthly benefits check averaging $1,368, or about $16,411 a year. That may not sound like a lot, but Social Security accounts for at least half the income of 61% of retired workers each month.
Social Security's growing importance is a direct result of the poor financial habits of working Americans and seniors. For instance, personal saving rates are less than half of what they were 50 years ago, and nearly half the country isn't invested in the greatest wealth-creator on the planet: the stock market. As a result, retirees are leaning far too heavily on Social Security during their golden years. For some perspective, the Social Security Administration says your retirement benefits are only designed to replace about 40% of your working wages.
That said, Social Security itself is creating plenty of problems for seniors. The program should adapt with seniors' changing financial needs, and yet certain aspects of Social Security haven't been adjusted in well over three decades. That puts either the program, seniors, or both at a pretty substantial long-term disadvantage.
Here are three aspects of Social Security that haven't been changed for at least 34 years.
1. The threshold on benefits taxation
One of the biggest issues for seniors with Social Security is the taxation of their benefits. First of all, yes, your Social Security benefits may be taxable at the federal level, and perhaps even at the state level.
In 1983, Congress passed a new regulation allowing the IRS to collect federal income tax on up to 50% of a person's or couple's Social Security benefits. If an individual or couple earned more than a certain amount in income -- $25,000 for individuals and $32,000 for couples filing jointly -- then a portion of their Social Security benefits would be exposed to federal income tax. At the time this Amendment was passed, it was only estimated to affect about one in every 10 senior households.
In 1993, as part of the Omnibus Budget Reconciliation Act, a second set of thresholds was added. They kept the first set in place, but now individuals earning more than $34,000 and couples filing jointly who earned more than $44,000 could have up to 85% of their benefits exposed to federal income tax. When this was passed, about 18% of senior households were impacted.
But by 2015, according to The Senior Citizens League (TSCL), approximately 56% of senior households were paying at least some tax on their benefits. Why, you ask? Because the federal government hasn't adjusted the taxation thresholds since they were introduced in 1983. If these figures had been adjusted for inflation each year, they should have been $57,107 for individuals and $73,097 for couples as of 2015, per TSCL.
What was once designed to be a tax on well-to-do senior households has turned into a tax on well-to-do and middle-income senior households, and that's not OK.
2. Full retirement age determination
Another aspect of Social Security that seems somewhat outdated is its approach to determining recipients' full retirement age, or FRA. Your FRA is the age at which the Social Security Administration deems you eligible to receive 100% of your monthly benefit, and it's determined by your birth year.
In 1983, as part of the major overhaul to Social Security undertaken during the Reagan administration, four decades' worth of FRA increases were laid out. These changes were designed to take the FRA from age 65 in 1983 to age 67 by 2022 for those born in 1960 or later. Beginning in 2017, and for each of the next five years, we'll see the full retirement age increase by two months.
Though the FRA isn't currently static, the thinking behind the scheduled increases certainly is. No new amendments concerning the FRA have been introduced since 1983. Meanwhile, average life expectancies in the U.S. have risen by 4.2 years over that time frame -- more than twice the pace the FRA is set to rise over a 40-year period. What this means for Social Security is that seniors can now draw a payment from the program for a longer period of time.
The failure of the program to adjust for Americans' increasing longevity is one of the reasons why Social Security's reserve funds will soon start running out. This is also among Congressional Republicans' main arguments for gradually raising FRA beyond 2022, when the current amendments run their course.
3. The COLA measurement
Finally, seniors have been seemingly getting the short end of the stick when it comes to their annual cost-of-living adjustment (COLA).
Since 1975, Social Security's COLA has been indexed to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If the average CPI-W reading in the third quarter of the current year is higher than the average CPI-W reading of the third quarter of the previous year, the percentage increase (rounded to the nearest 0.1%) is what gets passed along as a "raise" for Social Security beneficiaries. However, if the CPI-W falls year over year, benefits remain flat. In three of the past eight years, seniors have received no COLA as a result of a lower year-over-year CPI-W reading.
The problem is that seniors' expenditures have changed a lot since 1975, and the CPI-W has arguably not kept pace. Because the CPI-W is designed to measure the expenditures of select working Americans and not seniors, it under-represents what seniors spend on things like housing and medical care, while expenditures like education, apparel, food, entertainment, and transportation are overstated compared to what seniors actually spend in these categories.
A better metric for determining Social Security's COLA would likely be the Consumer Price Index for the Elderly (CPI-E), which reflects expenditures among Americans aged 62 and older. In short, the CPI-E would help seniors receive more accurate annual "raises" relative to the inflation they're facing. Switching to the CPI-E has long been supported by Congressional Democrats, and given that the CPI-W has been the standard for 42 years, it could be time for Congress to revisit its COLA measurement.
Long story short, Social Security is showing its age, and if lawmakers don't work to update these shortcomings, seniors will pay the price.
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