The recent release of the Social Security Trustees Report has once again highlighted the financial difficulties that the Social Security program faces. Without action, the trustees expect that by 2034, trust fund assets will be exhausted, and that will bring about an immediate crisis that could lop more than 20% off every single recipient's benefits. With more than 60 million people currently on Social Security -- and more expected in the years ahead -- the magnitude of the crisis could be devastating.

Plenty of policymakers have proposed solutions to Social Security's financial woes. Major changes to payroll taxes would potentially bring in more revenue to cover benefit costs, while more modest reductions to benefits could buy some time as well. Yet one group believes that as long as lawmakers are willing to act sooner rather than later, a more subtle change could preserve Social Security's long-term future.

Social Security card embedded in coins.

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A hidden way Social Security benefits rise over time

Most Americans understand that Social Security benefits are designed to help retirees and other recipients make ends meet in retirement. A key feature of how Social Security accomplishes this is through annual cost-of-living adjustments, or COLAs. That ensures that to the extent that increases in the living expenses that seniors pay are reflected in the particular Consumer Price Index measure that the Social Security Administration uses to calculate COLAs, benefit checks will rise to keep up with inflation.

Yet there's a different way in which the costs that Social Security incurs to cover retirees grow even faster than inflation over time. Those added costs are embedded in the formulas that determine benefits for retirees from year to year.

The benefit formula incorporates what are known as bend points based on your average monthly indexed earnings over a 35-year career. Below a certain minimum level -- $895 per month in 2018 -- Social Security pays out 90% of income in your monthly benefit if you retire at full retirement age. Between the minimum and a second threshold amount -- $5,397 in 2018 -- you get credit for 32% of average monthly earnings. Above the top bend point, you get 15%. So, for instance, if you turn 62 in 2018 and your average monthly earnings were $6,000, then your full retirement benefit would be 90% of $895, plus 32% of the difference between $895 and $5,397, plus 15% of the difference between $5,397 and $6,000. That'd work out to $2,337 per month.

Why tomorrow's Social Security recipients will get more than today's

There's nothing wrong with bend points, as they create a progressive system that provides a higher percentage of replacement income for low-income workers who need it most. But the way that bend points get adjusted over time is a problem, as the Tax Foundation noted recently.

The problem stems from the way in which bend points rise over time. Rather than using the CPI, bend points rise in line with wage growth. Because wages tend to rise more quickly than inflation, benefits for future recipients will be worth more in inflation-adjusted terms than what today's recipients get. Specifically, the Tax Foundation estimates that over the next 50 years, real wages will double even after adjusting for inflation, and that will result in Social Security benefits that have twice as much purchasing power as what recipients get today.

To solve the problem, the Tax Foundation suggests making benefits grow more slowly than average wages. Simply by using the CPI to adjust bend points, the growth in benefits would decelerate. As long as enough lag time were built into the system, then the slowdown could be enough to extend Social Security's full financial viability indefinitely into the future.

Pros and cons

On one hand, a solution to Social Security's fiscal woes would be useful. Gone would be the uncertainty about whether future benefits will be available to recipients. That'd allow for better planning to cover any income gaps between what you'd need and what Social Security would provide.

Advocates already argue, however, that Social Security doesn't cover enough of the average American's retirement costs. Limiting growth in the future could effectively end any hope of turning Social Security into a viable means of sustaining financial security in retirement in the years to come.

Social Security's financial problems have been evident for a long time, yet lawmakers so far haven't taken action. A long-term solution like the one the Tax Foundation proposes could draw debate, but it would at least resolve the outstanding issue in a way that would be gradual and predictable in the decades to come.

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