Tag: Social Security expansion

Originally published at Forbes.com on June 13, 2022.

In the news last week:

“Sanders, Warren propose bill to extend Social Security’s solvency for 75 years, increase benefits by $2,400 per year.”

As reported by CNBC, Senators Bernie Sanders (I-VT), and Elizabeth Warren (D-MA) introduced their latest version of a Social Security expansion and solvency bill, the Social Security Expansion Act. It has many similarities with the Social Security 2100 Act introduced repeatedly, most recently in November, by John Larson (D-CT), which, at the time, I criticized for, among other failings, introducing benefit boosts which would expire after 5 years, with the intent of appearing to be cheaper, but which would destroy the fundamental promise of Social Security, that of a stable, predictable benefit formula.

The Sanders and Warren version, for what it’s worth, does not play these games. Its increases are designed to be permanent, boosting benefits by an immediate $200 per month, setting a new per-person minimum benefit of 125% of the single-person poverty rate, adopting a more generous CPI index, and continuing benefits for the children of disabled or deceased workers up to age 22 rather than 18 for full-time students.

The bill, which was also introduced in the House with 19 co-sponsors, keeps the Social Security system funded for the entirety of the 75 year forecasting period, according to the analysis performed by Social Security’s Office of the Chief Actuary. How does it manage this? Fundamentally, with a tax hike on the wealthy and upper-middle-class.

• Wages above $250,000 annually would be taxed at the same rate as workers currently pay in FICA taxes, 12.4%. This cut-off would not be adjusted for inflation, so that as soon as the existing earnings ceiling exceeds this level, all wages would be taxed, but above the earning ceiling, workers would pay taxes without earning additional benefits.
• Households with earnings above $200,000 (single) or $250,000 (joint filers), again unadjusted for inflation, would also pay tax of 12.4% on their investment earnings, similar to the additional Medicare tax implemented to fund Obamacare.
• And active S-corporation officers and limited partners would pay taxes at the combined Social Security + Medicare rate, or 16.2%.

This certainly fits in with politicians’ ongoing calls to “Scrap the cap” or that “the rich should pay their fair share.” As CNBC reports,

“’Today, absurdly and unfairly, there is a cap on income subject to Social Security taxes,’ Sanders said in prepared remarks during a Thursday Senate hearing.

“Currently, a worker earning $147,000 pays 6.2% of their income to Social Security payroll taxes. But if instead they earn $1.47 million, they pay just 0.6% of their income to Social Security, Sanders said.

“’That may make sense to somebody,’ Sanders said. ‘It doesn’t make sense to me.’”

Now, if we were speaking of the “fair” rate of income tax, no one would hesitate to say that it would be unfair for lower-income workers to pay a higher rate than the rich. But how precisely should we define what’s “fair” when it comes to a social insurance program, where Americans have been told for generations that they “earn” their benefits through the taxes they pay? Is it “fair” for upper-income Americans to subsidize everyone else’s Social Security benefits, or “unfair” to expect middle-income workers to pay their own way? “Fair” isn’t really a word that means anything in this debate — but don ‘t be fooled: even though the rates higher income earners pay, now on all income rather than wage income, are the same as the level of FICA contributions, these are just taxes, plain and simple.

Longtime readers will know that I’ve repeatedly said that it is outside the norm internationally to fund Social Security programs through such general income taxes and that even our wage base is unusually high. I’ve also argued that even if we collectively decided that’s what we want to do, we have to be aware that in doing so we give up the ability to use that tax money for any of the other ways we’d like to spend government money, from education to childcare and parental leave to better support for the disabled or those out of work, to, these days, yes, reducing the deficit, even though we are increasingly comfortable with the idea of middle-class workers “deserving” government benefits without those benefits being perceived of as “welfare.” It is also increasingly clear that the old notion that “Social Security must be contributory because people will not stand for a welfare program for the middle class” no longer holds in many ways.

But all that aside — once we establish this norm, why should the cut-off at which earnings no longer accrue benefits, remain where it is? Why should someone earning $147,000 a year earn benefits on the whole amount, when setting the cut-off at a lower level would mean more revenue going into the system? It may seem obvious that this threshold wouldn’t decrease, but I don’t think supporters of Sanders’ plan should take that for granted at all.

What’s more, Sanders’ plan combines the trust funds and tax rates for the old age/survivor’s and the disability parts of Social Security for the first time. What might that mean? It is well-known that it is so difficult to get an approval for disability benefits, that people have to spend money on a lawyer (forego a large part of their back benefits) just to make it through the system. The requirements for eligibility are also muddled, requiring in some cases that a person be unable to ever work any kind of job at all, where other countries have benefits for a “partial disability.” Why not reduce the benefits accrual cut-off wage and use the money saved for other, more pressing needs? How much money would be available for other needs if benefit accrual ended at $125,000, $100,000, or $75,000 instead? Or, looked at it another way, what justification is there for giving people government benefits on income up to as high as $147,000 when there are so many other needs (and such a high federal deficit)?

The Democrats have pitched their proposals to “Scrap the Cap” for years and polls show a fair degree of support, but it is simply necessary to understand that this proposal is a much more radical change than it might seem.

 

Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Originally published at Forbes.com on December 18, 2021.

 

In 2014, Rep. John Larson introduced for the first time a bill called the Social Security 2100 Act, which consisted of seven provisions intended to boost Social Security’s benefits and revenues, with revenue increases intended to be sufficient to remedy forecasted shortfalls and fund the benefit increases, and with confirmation of such by the Social Security Chief Actuary.

The bill would have increased benefits by

• Instituting a special 125%-of-single-person-poverty minimum benefit for those with 30 years of work history,
• Increasing the first PIA formula factor from 90% of pay to 93%,
• Using the CPI-E elderly-specific CPI index for cost-of-living adjustments, and
• Increasing the benefit taxation thresholds to $50,000 single/$100,000 married (this would have been a temporary change as it wouldn’t be adjusted for inflation).

And it would have funded these changes and restored solvency by

• Applying the payroll tax rate to earnings above $400,000 (there would have been a trivial/symbolic 2% accrual rate on these wages),
• Increasing the payroll tax by 1% for each of employer and employee (phased in over 20 years), and
• Investing up to 25% of Trust Fund reserves in the stock market.

The bill, at the time, never went anywhere, though Larson has since reintroduced it several times, but I bring it up to serve as contrast to his most recent version of this legislation, which he calls “Social Security 2100: A Sacred Trust,” and which he introduced at the beginning of November with 200 Democratic cosponsors, because his new version has changed substantially.

It no longer targets restored solvency.

It no longer asks all Americans to pay more to fund benefit improvements they themselves would receive at retirement.

Most concerningly, it plays the same games with temporary benefits as in the Build Back Better bill, but with more serious consequences.

Specifically, the bill would

• Increase benefits by about 2%,
• Adopt the CPI-E COLA adjustment,
• Implement a 125%-of-single-person-poverty minimum benefit,
• Increase benefits for surviving spouses in two-earner households,
• Repeal the Windfall Elimination Provision and the Government Pension Offset,
• Provide up to five years of caregiver credits,
• and other enhancements,

 

— but these increases would only last for five years! And this very short duration of benefit boosts is not mentioned in the bill’s “fact sheet” or press release, and it goes unmentioned in media reporting, such as at CNBC or MoneyWatch (though, to be fair, larger news outlets do not appear to have covered it at all).

What’s more, the payroll tax hike is no longer on the table, only the increase on wages above $400,000, and as a result, the insolvency date is only delayed until 2038 (as calculated by the Social Security Chief Actuary), which is a mere five years’ extension on the current projected insolvency date of 2033.

Alicia Munnell, director of the Center for Retirement Research at Boston College, further calculates that, over the coming 75 years, if indeed the new provisions remain for the five years provided for in the new legislation, the 75-year deficit would be reduced from 3.5% of taxable payroll, to 1.7% of payroll. However, if those provisions were made permanent at the end of five years, Social Security’s long-term deficit would remain nearly unchanged. And allowing the provisions to expire, she writes, would create “chaos administratively and in terms of public perceptions.”

She writes, “The staff of the Social Security Administration and the agency’s computer capability are already stretched thin; implementing a dozen new provisions would be an enormous challenge. And think about explaining to angry participants why their cost-of-living adjustments suddenly drop when the CPI-E provision expires. Turning provisions on and off will confuse people enormously, and undermine confidence in the program.”

Munnell is right. In fact, she understates the problem.

Consider that in many respects, we have gotten used to the sorts of games politicians play with sunsets and temporary provisions.

We can roll our eyes when the Republicans temporarily cut taxes, with a 10-year sunset due to the nature of reconciliation bills, or when Democrats do the same with tax credits. But we (most of us, anyway) don’t order our lives around the precise marginal tax rate we pay.

It is considerably more problematic when, as in the case of the Build Back Better bill, programs such as universal pre-school or heavily subsidized or free childcare are designed to end after a short number of years, due to the massive cost in implementing these programs and the disruption if they end — not just the administrative effort but the construction cost of new public school preschool classrooms replacing church and private programs, for example.

But it is even worse to introduce this sort of temporary benefit into Social Security, which is a core bedrock social insurance program built on the foundational premise of stability, so that Americans can plan their retirement savings with a reliable prediction of future benefits. If the Democrats increase benefits for 5 years, they have created a precedent which will surely open the path for frequent tinkering, including “temporary” retirement age increases or benefit cuts, in a manner no different than the tax system or pretty much any other sort of federal spending. When it’s all said and done, Social Security would lose its special status and take its place instead among the multitude of programs over which current beneficiaries/advocates fight, from student loans to electric vehicle subsidies.

All of which means that it should have been unthinkable to propose these sorts of temporary changes for Social Security, and it is in fact quite concerning that House Democrats don’t see it that way.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.