Social Security is a savior of a program for our nation's retired workforce. The sheer fact that Social Security provides a monthly benefit to more than 43 million retired workers keeps some 15.3 million of these retirees above the federal poverty line, according to a recent analysis from the Center on Budget and Policy Priorities. It's simply indispensable to aged beneficiaries.
But for as much love as Social Security receives, it nets its share of vitriol from the public as well. There are some aspects of the program that are, for lack of a better word, hated. And while the American public and most retirees would probably like to see these hated Social Security rules go away, that's simply not going to happen. Here are three of those reviled rules you'd best get used to.
1. The taxation of Social Security benefits is here to stay
Among the many changes passed in the Amendments of 1983 was the implementation of the taxation of Social Security benefits for single taxpayers and couples filing jointly who earn over certain income thresholds.
If a single taxpayer's adjusted gross income (AGI) plus one half of their benefits surpasses $25,000 ($32,000 for a couple filing jointly), they'll face federal ordinary income tax on up to half of their benefits. A second tier of taxation was added under the Clinton administration in 1993 for taxpayers earning more than $34,000 and couples in excess of $44,000. This second tier allows up to 85% of Social Security benefits to be taxed at the federal rate. To boot, 13 states also tax Social Security benefits to some varied degree.
The American public absolutely loathes this tax and believes that middle-class retirees would be in much better shape financially if it were repealed.
Making matters worse, the earning thresholds described above haven't been adjusted for inflation since they were introduce in 1983 and 1993, respectively. This means that as time has passed, the taxation of benefits has gone from impacting around 1 in 10 senior households in 1983 to about 56% of senior households today, per The Senior Citizens League.
The reason this tax isn't going away, nor will these income thresholds be adjusted for inflation, is simple: Social Security is facing a more than $13 trillion cash shortfall between 2034 and 2092, and the program needs every cent in revenue it can get. Although the taxation of benefits collected "just" $37.9 billion in 2017 (less than 4% of all income for Social Security), its importance is expected to grow over time, especially with the real possibility of interest income disappearing within the next two decades.
There's virtually no way Congress will move to repeal the taxation of Social Security benefits.
2. The retirement earnings test for early claimants isn't going anywhere
A second Social Security rule that's often detested is the retirement earnings test, or RET. The RET allows the Social Security Administration (SSA) to withhold some or all of a beneficiary's payout depending on their income. It's worth pointing out that the RET is only applicable to beneficiaries who haven't hit their full retirement age (i.e., the age at which they're eligible to receive their full retirement benefit, as determined by their birth year). If an aged beneficiary has hit or passed their full retirement age, the retirement earnings test won't apply to them.
In 2018, an early claimant, say between ages 62 and 66, who won't hit their full retirement age this year, can earn up to $17,040 a year ($1,420 a month). For every $2 in earnings above this level for folks who are currently receiving a Social Security benefit, the SSA can withhold $1 in benefits, up to the full amount that you'd be due for the year.
A separate category exists for early claimants who'll hit their full retirement age in the current year but have yet to do so. Should you fall into this category in 2018, you can earn up to $45,360 ($3,780 a month) without any withholding from the SSA. But for every $3 in earnings above this amount, the SSA will withhold $1 in benefits.
The silver lining here is that withheld benefits aren't lost. They're returned to the beneficiary in the form of a higher monthly payout once they reach full retirement age. But the downside is that the RET denies early claimants the ability to double dip on income if still working. This added income could be beneficial if they're trying to pay off a mortgage, student loan, or other form of debt prior to retirement.
Since the federal government would prefer to see the American public wait longer to claim Social Security benefits rather than claim as soon as possible at age 62, it's unlikely that we stand any chance of the RET being removed.
3. Everyone hates the CPI-W, but no one will do anything about it
Finally, both the American public and your elected officials in Washington tend to dislike Social Security's inflationary tether that determines its annual cost-of-living adjustment (COLA). This tether is officially the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The CPI-W has eight major spending categories, with countless subcategories, that measure the change in price for a predetermined basket of goods and services. Specifically, only the average readings from the third quarter of the previous year (July through September) and the third quarter of the current year are examined when determining COLA. If the average CPI-W reading rises, then beneficiaries receive a "raise" that's commensurate with the percentage increase, rounded to the nearest 0.1%.
Sounds straightforward, right? Well, the problem with the CPI-W is that it doesn't do a very good job of looking after the people the Social Security program is designed to protect: senior citizens. As its name implies, the CPI-W measures the spending habits of urban and clerical workers, who, as you'd expect, spend their money very differently than seniors. This results in important expenses to aged beneficiaries, such as medical care and housing, getting less emphasis than they should, while less-important costs like education, apparel, and transportation get added weighting. Ultimately, seniors aren't receiving an adequate COLA to match the inflation they're facing.
Even though Republicans and Democrats agree that the CPI-W isn't doing its job, neither party has the ability to replace it. That's because the GOP and Democrats have solutions that are on opposite sides of the spectrum. Plus, it would take 60 votes in the Senate to amend Social Security, and there's simply no chance of bipartisan support on this issue in Washington.
Long story short, the CPI-W isn't going anywhere.
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