Strengthen Social Security, Increase Benefits, Cut Taxes for Seniors

[Independent]

Why not eliminate the current cap on SS to shore it up? What is sacred about the income current limit? Is it a fact, research or logic based cap? Why is there any income limit at all?

I believe that option is the most popular (i.e. least unpopular) of the increase taxes or decrease benefits choices.

You can find the numbers by following USGrant's link. It is the first option in the "Revenues" tab. The Reformer: An Interactive Tool to Fix Social Security

 

[Calico]

This thread is interesting and I would like to see it continue. I imagine it is of interest to retirees and near-retirees alike. I hope it doesn't die because emotions or politics get the upper hand.

Thanks are extended to the moderators for keeping things on an even keel.

 

[Independent]

Hint: It wasn't originally established as a pay as you go system.

How do you know that?

I'm not familiar with the benefit formula in the 1935 bill. Nobody received any benefits under it because they changed it in 1939.

Famously, Ida Mae Fuller was the first beneficiary.

Ida May Fuller worked for three years under the Social Security program. The accumulated taxes on her salary during those three years was a total of $24.75. Her initial monthly check was $22.54.

I can't believe that anyone thought you could have an advance funded system where one monthly benefit after retirement nearly equaled the total of all taxes the worker paid.

Both the 35 and 39 acts had scheduled significant tax increases in the early years. Exactly what you would expect in a paygo system.

 

[USGrant1962]

In theory--no problem. Put another knee in the payout formula so those over xx income ($128K? $400K?) receive an even lower payback than the current lowest rate. So, the income cap on FICA payroll taxes would be officially removed, but those who pay in at higher income levels would expect to get very little in return.
I'm not saying I favor this, I'm saying that's how it could go. Even if high income earners got the present lowest replacement rate, it is still a very "bad deal" for them (i.e. a net transfer of wealth from high income folks to lower income folks).

I think the proposed bill does this, but an an usurious rate. From the Actuary's report, I think they are proposing a new 2% range in the bend point calculation:

Section 201 and Section 202) Apply the OASDI payroll tax
rate on covered earnings above $400,000 paid in 2020 and
later, and tax all covered earnings once the current-law taxable
maximum exceeds $400,000. Credit the additional earnings
taxed for benefit purposes by: (a) calculating a second average
indexed monthly earnings (“AIME+”) reflecting only earnings
taxed above the current-law taxable maximum, (b) applying a
2 percent factor on this newly computed “AIME+” to develop
a second component of the PIA, and (c) adding this second
component to the current-law PIA.......

I think this means that for higher earnings they are only paying back 2%, down from 15% at max earnings now. Maybe a legal eagle can clarify the language?

The other thing not mentioned in the press release is that the first 90% bend point calculation is increased to 93%, which is an additional cost.

So this bill increases SS expenditures by:

• All benefits by +2%
• 1st bend point from 90% to 93% (increases benefits for everyone, not discussed in the press release)
• Minimum benefit to 125% of poverty line
• Inflation to CPI-E
• Higher SS taxation thresholds (SS taxation goes directly to the SS trust fund, so this is a cut to the SS fund)

With revenue increases from:

• ~20% SS tax increase for all workers
• New taxation of wages >$128K eventually (>$400K to start)

My thoughts are that:

• the +2% benefits bump and 90->93% bend point calc are simply vote buying with taxpayer money;
• the minimum 125% poverty payment is reasonable within the "safety net" context of SS;
• CPI-E creates a systemic problem because wages, which fund SS, increase closer to CPI-U so will diverge, though it will take decades to be significant;
• Higher SS taxation thresholds need to be viewed in context of direct reductions of the SS Trust fund (taxation of SS benefits goes directly to the Trust Fund) in favor of higher-earning seniors, OTOH current payers won't get nearly the returns of current beneficiaries so maybe it is OK going forward;
• A 20% SS tax increase seems excessive, seems to me that 10% plus taxing all wages would do to stabilize the system. SS is a very regressive tax.
• Raising the cutoff for SS taxation is reasonable as long as some level of benefits remain attached to it, but it needs to be phased in as well or could be a massive hit on the economy, especially on the corporate side.

 

[pb4uski]

... I am not a soak the rich kind of person, but this is the easy one. IMHO.

I suspect that we agree.... and disagree. If you had said that you are not a soak the rich kind of person so this is an easy one then I ssupect that we would be in full agreement.

 

[Sunset]

SS was created as a safety net , not a retirement plan. Deviation from that has created this intractable situation. The baby boom population bubble will just about all be beneficiaries by the time the system has no surplus.

Now is the time to do nothing. Yes, doing nothing is better than continuing to monkey with the system. Put me in the nut job category if you don't agree, I'm sticking to my position.

It will not go bankrupt, but just revert to real sustainability.

The working poor do not have a nickel to fund an IRA, i understand, and likely will work until disability or death. I spent over a decade in municipal gov. , often knee deep in very low income neighborhoods. SS cant fix this.

SS just is not a full retirement plan

Off my soapbox for today.

I've only read to the 2nd page so far, and maybe you covered this later.

But SS was also not a disability plan like today, so many folks now seem to qualify it is amazing.
Perhaps it's because they read on the form;
if they wait to 65 they get X, but if they become disabled after 10 years work, they get the SAME X.
No need to work an extra 20 years !!!

For that reason, I think the disability part should be kept separate from the normal SS, otherwise nobody realizes how badly the DSS is being drained.

 

[brucethebroker]

.
“Today, over 200 Members of Congress came together on the anniversary of President Franklin Delano Roosevelt’s birth to honor his legacy, and to enhance and expand the nation’s most successful insurance program, Social Security, which touches the lives of every American.
.

The timing "anniversary of..." suggests to me that is more about symbolism/press release than passing actual reform.

 

[marko]

I believe the reason for the wage cap is because social security has a maximum pay-out cap. IOW you're paying only for a certain maximum death insurance coverage. Ergo they can't make the amount taxable unlimited

That's the way it's been put to me and has appeared on this forum some years ago.

I don't know the reasoning either but I would usually hit the cap sometime in early March.

I never understood it and while I wasn't going to complain, I wouldn't have minded paying throughout the entire year. The whole thing struck me as wrong headed.

There's lots of things I'm taxed on that I'll never see the direct benefit of; if SS is so threatened an open cap seems like an easy, fairly painless way to get there.

 

[Bir48die]

I've always promoted taking the cap off earnings. Every year I would get my bonus in February and that combined with salary would put me at the cap by mid or end of May. Pretty decent monthly raise after that. I was willing to donate for the total years earnings to help keep the program solvent. So now it too late for me but still think that part is an easy and automatic fix

 

[gauss]

Several on this thread have suggested that there is some type of maximum per-worker monthly Social Security payout that applies to everyone. Many would infer that this is written into current law or regulation.

My understanding is that this is simply not the case.


Individual Social Security payouts are based on an individual's AIME (ie average indexed monthly earnings), the PIA/AIME curve (with its associated 'bendpoints') year of birth and year of initial draw.



The fact that we can identify a maximum amount that an individual can receive today is solely due to the fact that the amount of their wages each year that was subject to SS/FICA taxes was capped.

Stated a bit differently, an individual's AIME is limited due to the wage cap on SS withholding.

If we remove the wage cap, as suggested by the legislation, the amount available to a high earner would, in theory, be unlimited.

Note #1) This discussion applies to how SS works under today's laws.

Note #2) There are caps that limit what SS can pay to some individuals (ie windfall, family maximums etc.) but these do not apply to all earners.

-gauss

 

[brett]

The real issue is that it takes politicians with insight and with guts to make change since change will cost voters money. And this could impact elections.

 

[Independent]

I've used this example before, but I'll try it again:

A) Andy had a very low income, saved virtually nothing, arrived at retirement with a $12,000/yr SS benefit and no savings.

B) Bob had a high income, saved a reasonable percent, had decent investment returns, and arrived at retirement with substantial assets plus a $28,000/yr SS benefit.

C) Chuck had a high income, saved virtually nothing (or had disastrous investment returns), arrived at retirement with no assets, but with a $28,000/yr SS benefit.

As a taxpayer, I'm fine with paying taxes so Andy can get his basic benefit. It allows him to live indoors and shop in grocery stores.

I'm also okay with providing a basic benefit for Chuck. Regardless of the reason, I don't want him homeless and starving in old age.

And, I understand that if we provide a benefit for Chuck, we need to provide just as much for Bob. If we don't, we "penalize Bob for saving".

But, I don't have a good reason for giving either Chuck or Bob a higher benefit than Andy. If $12,000/yr is enough to provide the basics for Andy, that's enough for Bob and Chuck as well. This is especially true when I understand that many people paying SS taxes today earn a lot less than Bob or Chuck did.

I know that some people will say that Bob and Chuck paid more taxes than Andy, so they should get a higher benefit. I don't see that. We don't apply that reasoning to food stamps or Medicaid or Medicare or police protection or parks or schools (mostly). I don't know why SS should be the exception (other than politics).

Some proposals for SS reform include "progressive indexing" - slowing the nominal growth in higher benefits. I like that idea. Long term, I think SS should transition to a flat benefit at some number around the poverty level.

 

[JoeWras]

If we remove the wage cap, as suggested by the legislation, the amount available to a high earner would, in theory, be unlimited.

Note #1) This discussion applies to how SS works under today's laws.

Note #2) There are caps that limit what SS can pay to some individuals (ie windfall, family maximums etc.) but these do not apply to all earners.

-gauss

I believe the bill discounts that payout heavily, although it is 'unlimited' as written. It sounds like the PIA for that over $400K is 2%. The current "last bend" PIA is 15%.

In other words, add another bend to the PIA formula. This verbiage also addresses that the "donut" hole will also eventually be filled (about 2048), but the discounted PIA over $400k stays. Basically, this should fix the problem 'forever' such than in 2080 when everyone is making $700k, their last $300k gets a PIA of 2% instead of 15%

From https://larson.house.gov/sites/lars...son Blumenthal Van Hollen_2019 0130_FINAL.pdf

Section 201 and Section 202.Apply OASDI payroll tax rate on covered earnings above$400,000 paid in 2020 and later. Reflect additional earnings subject to tax in computing the
PIA.These provisions apply the OASDI payroll tax rate to covered earnings above $400,000 paid in 2020 and later. The $400,000 level is a fixed amount after 2020 and not indexed to price inflation or average wage increase. All covered earnings would be taxed once the current-law taxable maximum exceeds $400,000, which is projected to occur in 2048. Any covered earnings above the higher of $400,000 or the current-law taxable maximum in a given year would be counted as “excess wages” and would be credited for benefit purposes by:
a. Calculating a second average indexed monthly earnings (“AIME+”) reflecting only additional earnings taxed under this provision,
b. Applying a 2-percent PIA factor to this newly computed “AIME+” to develop a second component of the PIA, and
c. Adding this second PIA component to the current-law PIA

For the current law SS PIA computation, see: https://www.ssa.gov/oact/cola/piaformula.html There is a discussion about bend points. The attached shows current bend points. The bill proposes a new one at 400k with a 2% slope.

 

[JoeWras]

Some proposals for SS reform include "progressive indexing" - slowing the nominal growth in higher benefits. I like that idea. Long term, I think SS should transition to a flat benefit at some number around the poverty level.

The progressive part is in this bill. (It is also in the current law, look at the current bend points.)

A new bend point is introduced at $400k per year. It is written such to not be indexed for inflation, so in 50 years or so, this will progressively affect a large number of people, not just the top x percent.

2% is near flat.

 

[Independent]

Several on this thread have suggested that there is some type of maximum per-worker monthly Social Security payout that applies to everyone. Many would infer that this is written into current law or regulation.

My understanding is that this is simply not the case.

Individual Social Security payouts are based on an individual's AIME (ie average indexed monthly earnings), the PIA/AIME curve (with its associated 'bendpoints') year of birth and year of initial draw.

The fact that we can identify a maximum amount that an individual can receive today is solely due to the fact that the amount of their wages each year that was subject to SS/FICA taxes was capped.

Stated a bit differently, an individual's AIME is limited due to the wage cap on SS withholding.

If we remove the wage cap, as suggested by the legislation, the amount available to a high earner would, in theory, be unlimited.

Note #1) This discussion applies to how SS works under today's laws.

Note #2) There are caps that limit what SS can pay to some individuals (ie windfall, family maximums etc.) but these do not apply to all earners.

-gauss

This is all correct regarding current law. Note that this proposal introduces a new bend point with a payout rate of 2% (instead of 15%) above that point. In theory, benefits are still unlimited, but there would be a lot of gain for the trust fund from those highest income workers.

 

[gauss]

This is all correct regarding current law. Note that this proposal introduces a new bend point with a payout rate of 2% (instead of 15%) above that point. In theory, benefits are still unlimited, but there would be a lot of gain for the trust fund from those highest income workers.

+1

Agreed.

Heck I wasn't even interested in continuing to work with only 22 or so years in in that I was already past the 2nd bendpoint for my lifetime earnings and only getting the 15% return.

People thought that I was leaving SS on the table by leaving so early, but having done the math, I knew I was past the sweet spot.

Thanks for the confirmation of my understanding of this.

 

[gerntz]

How do people who don't pay into SS help strengthen it? Referring to RR workers and some public workers. Are they off the hook of helping the poorest?

 

[joeea]

How do people who don't pay into SS help strengthen it? Referring to RR workers and some public workers. Are they off the hook of helping the poorest?

Yes, They are off the hook with regard to SS.

 

[Walt34]

The other proposal that I'm pretty sure we'll eventually see is that it will be 'means based' in the future meaning that many folks that are FIRE'd won't get anything even after a lifetime of contributions...

I don't see that happening, ever. It is so blatantly unfair and penalizes the ant and rewards the grasshopper (of Asop's fable fame) that all the ants would quickly modify their behavior to become grasshopper-like because the rewards to save and invest went away.

 

[Independent]

The progressive part is in this bill. (It is also in the current law, look at the current bend points.)

A new bend point is introduced at $400k per year. It is written such to not be indexed for inflation, so in 50 years or so, this will progressively affect a large number of people, not just the top x percent.

2% is near flat.

Yes, this bill makes the system more progressive by raising taxes on very high income people by more than it raises their benefits.

I was talking about reducing the real benefits of high income workers. I meant a flat dollar amount and not a flat percent.

 

[aaronc879]

I don't see that happening, ever. It is so blatantly unfair and penalizes the ant and rewards the grasshopper (of Asop's fable fame) that all the ants would quickly modify their behavior to become grasshopper-like because the rewards to save and invest went away.

I could see "means-based" SS happening but it wouldn't affect anyone on this forum. It would only affect people with at least 8 figures, probably 9 or 10+. I have no problem with that.

 

[aaronc879]

I've used this example before, but I'll try it again:

A) Andy had a very low income, saved virtually nothing, arrived at retirement with a $12,000/yr SS benefit and no savings.

B) Bob had a high income, saved a reasonable percent, had decent investment returns, and arrived at retirement with substantial assets plus a $28,000/yr SS benefit.

C) Chuck had a high income, saved virtually nothing (or had disastrous investment returns), arrived at retirement with no assets, but with a $28,000/yr SS benefit.

As a taxpayer, I'm fine with paying taxes so Andy can get his basic benefit. It allows him to live indoors and shop in grocery stores.

I'm also okay with providing a basic benefit for Chuck. Regardless of the reason, I don't want him homeless and starving in old age.

And, I understand that if we provide a benefit for Chuck, we need to provide just as much for Bob. If we don't, we "penalize Bob for saving".

But, I don't have a good reason for giving either Chuck or Bob a higher benefit than Andy. If $12,000/yr is enough to provide the basics for Andy, that's enough for Bob and Chuck as well. This is especially true when I understand that many people paying SS taxes today earn a lot less than Bob or Chuck did.

I know that some people will say that Bob and Chuck paid more taxes than Andy, so they should get a higher benefit. I don't see that. We don't apply that reasoning to food stamps or Medicaid or Medicare or police protection or parks or schools (mostly). I don't know why SS should be the exception (other than politics).

Some proposals for SS reform include "progressive indexing" - slowing the nominal growth in higher benefits. I like that idea. Long term, I think SS should transition to a flat benefit at some number around the poverty level.

I agree with all you said except I think the flat benefit amount should be at least 125% of poverty putting it at around $15,000 for a single person rather than $12,000.

 

[samclem]

I could see "means-based" SS happening but it wouldn't affect anyone on this forum. It would only affect people with at least 8 figures, probably 9 or 10+. I have no problem with that.

If the bar is really that high, then it won't save an appreciable amount in SS expenditures, especially in relation to the cost it would take to set up and administer an entirely new asset-based test regime.

And once an asset-based taxation/benefits scheme is set up, there will be >very< powerful incentives to use it more broadly. I see that camel's nose getting under the tent from here, and would be eager to prevent that. The wealthy would get that money into trusts before we can say "lawyer and accountant full employment program," and only the poorer saps will get skewered.

Asset-based taxes or tests are a nightmare, encouraging all kinds of wasteful market-distorting shenanigans and fraud.

 

[USGrant1962]

I could see "means-based" SS happening but it wouldn't affect anyone on this forum. It would only affect people with at least 8 figures, probably 9 or 10+. I have no problem with that.

Why bother - that wouldn't save any measurable money.

 

[MichaelB]

And once an asset-based taxation/benefits scheme is set up, there will be >very< powerful incentives to use it more broadly. I see that camel's nose getting under the tent from here, and would be eager to prevent that. The wealthy would get that money into trusts before we can say "lawyer and accountant full employment program," and only the poorer saps will get skewered.

Asset-based taxes or tests are a nightmare, encouraging all kinds of wasteful market-distorting shenanigans and fraud.

No disagreement with that. Funny thing is, IMO we already have a quasi-asset tax - the capital gains tax - because it is not indexed to inflation, so part of the value of the asset itself is subject to taxation.


Tax system complexity always favors the wealthy and upper income segments.