Social Security tends to undergo plenty of changes that workers and seniors need to adjust to every year. But some of the program's rules could use a serious refresh. Here are two in particular that are hurting seniors needlessly.
1. The taxation of benefits
Seniors on Social Security don't always get to keep their benefits in full. Rather, those with income outside of Social Security often lose a portion of their benefits to federal taxes.
Whether taxes apply or not hinges on provisional income, which is calculated by taking seniors' non-Social Security earnings and adding in 50% of their annual benefits. This formula itself isn't particularly problematic. Rather, it's the provisional income thresholds where taxes apply that are the issue.
For single tax-filers, a provisional income of $25,000 to $34,000 could result in having up to 50% of benefits taxed. Meanwhile, a provisional income above $34,000 could mean having up to 85% of benefits taxed.
For married seniors filing joint taxes, a provisional income of $32,000 to $44,000 could result in taxes on up to 50% of benefits. And a provisional income above $44,000 could mean taxes on up to 85% of benefits.
Clearly, these thresholds aren't very high. And the reason is that they were established decades ago. The provisional income limits calling for taxes on up to 50% of benefits were put into place in 1983, while the limits for taxing up to 85% of benefits were implemented in 1993.
But inflation has risen a lot since then, as have wages. And so to subject seniors to these dated thresholds does them a huge disservice.
2. The way COLAs are calculated
Social Security benefits are eligible for an annual cost-of-living adjustment, or COLA, the purpose of which is to enable seniors to maintain their buying power as living costs rise. COLAs are based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the CPI-W shows little to no change, COLAs follow suit. It's only when the CPI-W shows large upticks in inflation that benefits get a nice boost from one year to the next.
In 2022, Social Security benefits will be getting their most substantial raise in decades. But that doesn't change the fact that the system for calculating COLAs needs a serious overhaul.
The reason? While the CPI-W may be a reasonable measure of general inflation, it often fails to account for the specific cost increases seniors face. Take healthcare, for example. Healthcare inflation has soared in recent years, and seniors are often more burdened by medical expenses than their younger counterparts. Yet that's not a huge factor in determining Social Security COLAs.
The solution? Base those raises on a senior-specific index. In fact, advocates have long been pushing lawmakers to consider a special CPI-E, or Consumer Price Index for the Elderly, that targets the costs most likely to impact those on Social Security.
Social Security is far from perfect, and these two outdated rules certainly highlight that fact. While there's no guarantee the program will update these rules anytime soon, if senior advocates push strongly enough, we could see some positive chances come down the pike in the future.