Social Security's importance is virtually unparalleled in this country. It's a program that's making a payment to nearly 62.5 million people each month and, according to the Center on Budget and Policy Priorities, helps to keep over 22 million of these folks (a majority of whom are senior citizens) above the federal poverty line.
But, speaking candidly, it's also a program with a lot of fundamental flaws. Though there's a lot for the American public to not like about Social Security, the following three aspects of the program are arguably the worst.
1. The taxation of Social Security benefits
If there's an aspect of Social Security that's almost universally hated, it's the taxation of benefits. In March 2017, The Seniors Center, a Washington, D.C., nonprofit organization, released a survey that found that 91% of seniors believe Social Security benefits should no longer be subject to taxation.
Introduced in the Amendments of 1983, and implemented in 1984, the taxation of benefits allows up to 50% of an individual's benefits to be taxed at federal ordinary income tax rates if their adjusted gross income (AGI) plus one-half of their benefits exceeds $25,000. For couples filing jointly, this figure is $32,000. Then, in 1993, the Clinton administration created a second tier that allowed up to 85% of an individual's benefits to be taxed if exceeding $34,000, or $44,000 for couples filing jointly.
When these earning thresholds were first introduced in 1983 and 1993, they respectively impacted about 1 in 10 and 1 in 5 senior households. However, a recent analysis from The Senior Citizens League finds that 56% of senior households are paying some form of tax on their Social Security benefits today. That's because the income thresholds associated with taxation have never been adjusted for inflation.
2. The retirement earnings test
A second miserable aspect of Social Security is the retirement earnings test.
When originally devised in 1935, Social Security's architects assumed that qualifying recipients of a monthly benefit would be substantially retired. In essence, the entire reason for the benefit was to ensure that lower-income elderly persons who could no longer work had some form of income to fall back on during retirement. That, of course, isn't the case today, with seniors working well into their 60s and, in some instances, claiming their Social Security entitlement while working.
The retirement earnings test is what allows the Social Security Administration (SSA) to withhold some, or all, of a worker's benefit if their income crosses a certain level. It's only applicable to beneficiaries who are below their full retirement age (i.e., the age when you're eligible to receive your full payout, as determined by your birth year). The passage of The Senior Citizens' Freedom to Work Act of 2000 eliminated the application of the retirement earnings test to individuals who'd reached full retirement age.
Beneficiaries who won't reach their full retirement age in 2018 can have $1 in benefits withheld for every $2 in earnings above $17,040. Meanwhile, recipients who will hit their full retirement age later this year but have yet to do so can have $1 in benefits withheld for every $3 in earnings above $45,360.
The good news here is that you don't lose any of the money that's withheld. It's simply returned to you in the form of a higher monthly payout once you reach your full retirement age. But what stinks is that seniors who may want to reduce debt, pay down their mortgage, or deal with other costs prior to retirement may not be able to double dip with Social Security as a second income source as a result of the retirement earnings test.
3. The inflationary tether for COLA: the CPI-W
It has to be said: Social Security's inflationary tether is absolutely awful for seniors.
Since 1975, the program has used the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as its annual measure of inflation for a predetermined basket of goods and services. This inflationary measure is what determines the cost-of-living adjustment (COLA) that beneficiaries receive each year, assuming inflation is positive.
The biggest problem with the CPI-W is that, despite retired workers comprising 70% of all beneficiaries, an inflationary measure that tracks the spending habits of predominantly working-age urban and clerical workers is what's determining the program's annual COLA. As you can rightly expect, urban and clerical workers have very different spending habits than aged beneficiaries. What winds up happening is that important expenditures for seniors, such as medical care and housing, are underrepresented in the CPI-W. Meanwhile, less important costs like education, apparel, entertainment, and transportation receive added emphasis. This has resulted in a loss of purchasing power for seniors of 34% since the year 2000, according to The Senior Citizens League.
Here's the kicker: These worst aspects are here to stay
Now, the real kick in the pants for Social Security beneficiaries is that all three of the worst aspects are unlikely to change anytime soon.
Although the taxation of benefits is incredibly unpopular, the income generated each year is vital to keeping the program afloat. Last year, the taxation of Social Security benefits brought in $37.9 billion of the $996.6 billion collected. By 2027, revenue from the taxation of benefits is expected to more than double to $88.1 billion. The federal government simply can't afford to scrap this revenue source with Social Security already staring down a potential cash shortfall of $13.2 trillion between 2034 and 2092.
The retirement earnings test also isn't going away. It's designed as a means to encourage seniors to work longer and/or wait longer to claim their Social Security benefit. Working longer gives the program more opportunity to collect payroll tax revenue -- payroll taxes accounted for over 87% of last year's total income. At the same time, coercing aged workers to hold off on claiming their entitlement may reduce some of the strain on the program.
And finally, while both the Democrats and Republicans dislike the CPI-W and believe it does a poor job of passing along a proper raise each year, there's virtually no chance of reaching a bipartisan agreement and netting the 60 Senate votes needed to amend the current inflationary tether. Democrats and Republicans each believe they have the better solution, which eliminates the possibility of finding common ground for a fix.
In other words, we're probably going to be living with these worst aspects of Social Security for a long time to come.
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