How important is Social Security for today's retirees? According to new data from the Social Security Administration (SSA), 61% of all current retirees relies on their monthly benefit check for at least half of their income. And don't expect this reliance to wane anytime soon.
According to national pollster Gallup, 34% of non-retirees expect Social Security to account for a "major" part of their income, tied for the second-highest reading of all time, while just 19% of future retirees don't expect to be reliant on the income provided by the program. The poor saving habits of Americans, compounded with their avoidance of the stock market, arguably the best long-term wealth creator, hasn't exactly reduced the expected reliance on Social Security in the years to come.
Social Security is headed for trouble
If Social Security were in great shape, this wouldn't be too much of a concern. However, the program's foundation is crumbling before our eyes. The ongoing retirement of baby boomers from the labor force, a steady lengthening of life expectancies, and pervasive income inequality, with the rich living notably longer than the poor, is wreaking havoc on Social Security.
According to the 2017 report from the Social Security Board of Trustees, the SSA will begin paying out more in benefits than it's generating in revenue by 2022, ultimately leading to a complete exhaustion of some $3 trillion in asset reserves by 2034. Assuming Congress does nothing between now and then, benefits may need to be slashed by up to 23% across the board to keep Social Security solvent through 2091. On an aggregate basis, we're talking about a $12.5 trillion budget shortfall between 2034 and 2091.
Clearly, something needs to be done, and the American people are looking to Congress for answers.
Introducing the Social Security for Future Generations Act
While people were probably focused on healthcare discussions in June regarding the future of the Affordable Care Act, Rep. Al Lawson (D-Fla.) was busy introducing America to what he believes could be a game-changing bill to extend the life of Social Security. Dubbed the Social Security for Future Generations Act, Lawson's bill, which has 17 co-sponsors, has five key components:
- Reinstitutes the payroll tax on income above $250,000: A common solution to fix Social Security from Democrats is to increase taxation on the wealthy. As of now, only earned income between $0.01 and $127,200 is subject to Social Security's 12.4% payroll tax. Any income above and beyond this amount escapes Social Security's payroll tax. Lawson's bill would create a payroll tax moratorium on earned income between the maximum taxable earnings cap and $250,000, and then reinstitute the tax on earned income above $250,000. This proposal would probably be well received by the public since it would only affect a small percentage of working Americans.
- Establishes a special minimum payment for low-income, long-term workers: In addition to raising revenue from the rich, Lawson's proposal sends some of this newly generated revenue right back out. In particular, Lawson proposes a progressive minimum benefit for low-wage workers that would increase what they'd receive now. This progressive benefit would max out as long as a worker had 30 or more years in the labor force.
- Switches the cost-of-living adjustment to the CPI-E: Another popular proposal from Congressional Democrats is to switch the annual cost-of-living adjustment (COLA) from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E). As the name implies, the CPI-E would only factor in the expenditures of households with people aged 62 and up. The assumption is the CPI-E would give medical care and housing inflation more weighting, leading to larger annual COLAs (i.e., raises).
- Extends full-time student benefits through age 22: Lawson's bill would also allow full-time students, who can currently receive benefits until they reach age 19, to continue to receive benefits until age 23. This would presumably allow students and their eligible parent(s) added income to help pay for a college education.
- Boosts survivor benefits for widows and widowers: Lastly, Lawson's bill would help shore up survivor benefits to widows and widowers who lose a loved one.
When introduced, Lawson suggested that this bill could extend Social Security's asset reserve exhaustion date an additional 15 years to 2049, while in the meantime providing higher annual COLAs and larger minimum benefits.
Here's why we need a bipartisan bill
Though this all might sound great on paper, there's a key point you might have overlooked. Despite the taxation of income above $250,000, the additional payouts mean just 15 years is added to Social Security's solvency before major benefit cuts would be needed. In other words, this is a short-term fix, not a long-term solution.
I'm not denying that seniors could use larger COLAs to keep up with rising medical and housing costs, or that low-wage workers don't need a minimum benefit bump. However, it does suggest that approaching a fix with a single party's ideology in mind, be it Democrats or Republicans, probably won't work over the long run. For Social Security to have its best shot of long-term solvency, we need the core principles of Democrats and Republicans blended together.
As you saw with Lawson's bill, raising the maximum taxable earnings cap is the most popular solution of Democrats. In the case of Republicans, accounting for increased longevity is their go-to solution. Republican lawmakers have regularly proposed gradually increasing the full retirement age -- the age at which you become eligible to receive 100% of your monthly benefit -- from 67 years as of 2022 to 68, 69, or 70 years. This would take into account increased life expectancies and require seniors to wait longer to receive 100% of their benefit, or to accept a steeper permanent reduction if they claim early.
If Congress were to put forward a plan with higher taxes on the wealthy and a gradual increase to the full retirement age, there's a really good chance Social Security's imminent issues would be resolved. But will they? That remains to be seen.
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