Social Security's disappointing 2.5% cost-of-living adjustment (COLA) for 2025 has raised old concerns about its ability to adequately provide for the retirees who spent their careers paying into it. With the program hurtling toward a shortfall in about a decade, the cry for Social Security reform continues to grow louder.
So far, bills to alter the program, either to increase benefits or ensure its sustainability, have failed to gain traction. But that may be about to change. The Social Security Fairness Act has already passed the House and as of the afternoon of Friday, Dec. 20, the Senate was expected to vote on it soon.
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This bill would expand Social Security benefits for more than 2.7 million beneficiaries. But it comes at a cost that all workers and retirees may soon have to grapple with.
What is the Social Security Fairness Act?
The Social Security Fairness Act is a bill that, if passed, would eliminate two key provisions that limit benefits to some recipients: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The former affects retired workers who receive non-covered pensions -- pensions paid by employers that don't withhold Social Security taxes from their paychecks. This is common with state and local government employees. The latter provision affects spouses and surviving spouses of workers who received non-covered pensions.
The Windfall Elimination Provision (WEP)
The way current law has it, the Social Security Administration determines the size of most people's benefit checks by first calculating their average monthly earnings adjusted for inflation over their 35 highest-earning years, also known as their average indexed monthly earnings (AIME), and plugging it into the Social Security benefit formula. Here's what the current one looks like:
- Multiply the first 90% of your AIME by $1,174.
- Multiply any amount over $1,174 up to $7,078 by 32%.
- Multiply any amount over $7,078 by 15%.
- Add your results from Steps 1 to 3 above and round down to the nearest $0.10.
The result is your primary insurance amount (PIA). The system is designed so benefit checks replace more pre-retirement income for lower earners than higher earners. But those with non-covered pensions don't use the above formula.
For these workers, the WEP scales down the 90% threshold in the first step of the benefit calculation based on their years of coverage -- the number of years they paid Social Security taxes on their earnings. If they have 30 or more years of coverage, they'll still qualify for the 90% threshold in the first stage of their benefit calculation.
Those with fewer than 30 years of coverage see this threshold reduced by 5% for each year under 30 years of coverage with a floor of 40%. For example, someone with 29 years of coverage would only multiply the first 85% of their AIME by $1,174 instead of the first 90%. And someone with 20 years of coverage would use 40% here.
That means workers with non-covered pensions, and thus, fewer years of service, have smaller PIAs. This gives them smaller monthly benefits for life.
The Government Pension Offset (GPO)
The GPO has a similar effect for spouses and surviving spouses. It reduces these benefits by two-thirds of the monthly non-covered pension amount. For example, if a worker qualified for a $2,000 retirement benefit, their spouse's maximum spousal benefit would normally be $1,000.
But if that worker qualified for a $1,000 monthly non-covered pension, the Social Security Administration would subtract two-thirds of this -- $667 -- from the $1,000 spousal benefit, leaving the spouse with just $334 per month. This provision may completely eliminate spousal and survivors benefits for some workers if the non-covered pension is high enough.
These rules don't affect the vast majority of Social Security beneficiaries, but for those who are affected, they can have a huge effect on their monthly retirement income. It's easy to see why affected retirees would want these provisions repealed, but the consequences of doing so aren't all positive.
What's wrong with passing the Social Security Fairness Act?
Passing the Social Security Fairness Act would increase benefits for over 2 million retired workers and more than 734,000 spouses. But that's going to cost money -- $196 billion to be exact -- and money is something the Social Security Administration doesn't have a lot of right now.
The latest projections show the program's trust funds will be depleted in about 2034. After this, the government would have to reduce benefits by roughly 23% unless it implements some rule changes to either reduce benefits, increase Social Security taxes, or both.
Congress recognizes the problem but has thus far failed to agree on a solution. The longer the problem goes without being solved, the more difficult it becomes to fix. Passing the Social Security Fairness Act would accelerate the funding shortfall by roughly six months, according to the Congressional Budget Office. That may not seem like much to you, but it's enough to make some lawmakers less than enthusiastic about passing the bill.
We'll have to wait and see what the Senate decides to do, though we should know before too long. As for the bigger issue of Social Security's funding shortfall, it'll probably be a while before we see any sort of fix become a reality.
