Social Security has been around for a long time. And through the years, some of the program's rules have undergone changes.
It used to be, for example, that Social Security's cost-of-living adjustments (COLAs) had to be voted in by lawmakers. In the mid-1970s, the system changed to make COLAs automatic based on inflation.
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But a number of Social Security's rules are overwhelmingly shortsighted, to the point where they may be sorely hurting seniors today. Here are three problematic rules that could use a serious update.
1. How COLAs are calculated
The fact that Social Security COLAs are automatic is a positive change. The problem, however, stems from how they're calculated.
COLAs are based on an index called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When there's a rise in the CPI-W from one year to the next, Social Security benefits go up. But the CPI-W is not very reflective of the costs Social Security recipients tend to face.
Many Social Security recipients are not wage earners, nor do they necessarily live in urban areas. So it's silly to base their annual raises on an index that has little to do with them. If lawmakers were to change the way COLAs are calculated, basing those raises on a senior-specific index, it could improve many retirees' finances.
2. How do-overs work
Did you know that once you claim Social Security, your monthly benefits are not necessarily set in stone? Social Security has a lesser-known do-over rule that states that you can undo your claim within a year of filing and repay your benefits for the opportunity to sign up again at a later age.
This rule is important, because some people claim Social Security early, lock in reduced benefits, and regret that after the fact. The option to get a second chance (which all recipients get one of in their lifetime) is huge.
However, Social Security claimants only get a limited amount of time to make that decision and repay their benefits for a second chance. And the reality is that it takes time to adjust to living on Social Security.
Someone who claims benefits at 62 may not realize until nine or 10 months later that they can't keep up with their bills on their reduced benefits. At that point, there's limited time to repay the Social Security Administration the benefits they received by the 12-month mark to get a chance at a later filing.
As such, it would be good if lawmakers considered adjusting the timeline for Social Security do-overs to 18 or 24 months instead of just 12. It would give seniors more time to make an informed decision, and more time to pay back the benefits they may have already spent.
3. How benefits are withheld for exceeding the earnings-test limit
Once you reach full retirement age, which is 67 for anyone born in 1960 or later, you can earn any amount of money from a job while collecting Social Security without the risk of having benefits withheld. But if you work while on Social Security and you haven't reached full retirement age, you're subject to an earnings-test limit.
If you earn more than the earnings-test limit, your benefits aren't forfeited. Rather, they're withheld and repaid to you later in the form of larger monthly checks once full retirement age arrives. However, doing away with the earnings-test limit would be helpful to seniors, allowing them to keep up with their bills by supplementing their income without having to worry about withheld benefits.
The fact of the matter is that claiming Social Security prior to full retirement age results in reduced benefits for life. Why should early claimants who choose to work be punished financially beyond that reduction?
Also, working part-time can be a healthy thing for retirees from a social and mental health perspective. Social Security's earnings test creates a barrier to working and may discourage some seniors from getting a job that could help them financially and emotionally.
All told, there are lots of Social Security rules that could use some tweaking. It would be helpful if lawmakers would dig deeper into these three in particular to make life easier on the millions of seniors who collect those monthly benefits.
