Washington Wants to Make 2 Social Security Changes: How Much Would They Help Retirees?
The Social Security program provides monthly income to almost 20% of Americans, and it moved 26.3 million people out of poverty in 2021, according to the Census Bureau. However, the program is also facing several big problems, and two of the most pressing issues concern trust fund solvency and the buying power of Social Security benefits.
Social Security ran a $56 billion deficit last year, and the Board of Trustees says that trend could lead to trust fund depletion by 2035. At that time, payroll taxes would cover just 80% of scheduled benefits. Additionally, many policy experts believe benefits have fallen behind inflation. In fact, The Senior Citizens League says benefits have lost 40% of their buying power since January 2000.
Government officials in Washington have proposed numerous changes that address those issues. Two of the most common involve increasing Social Security payroll tax and changing the formula used to calculate annual cost-of-living adjustments (COLAs). But how much will those changes actually help? Here is what retired workers should know.
1. Increasing the Social Security payroll tax
Current law limits the amount of income that can be taxed by the Social Security program. The maximum taxable earnings limit is $147,000 in 2022, meaning anything above that threshold is not subject to Social Security payroll tax. For context, about 19% of income exceeded the taxable limit last year, so several politicians have suggested expanding Social Security payroll tax.
For instance, Rep. John Larson (D-Conn.) introduced the Social Security 2100 Act last year. Among other changes, the bill would apply Social Security payroll tax to income above $400,000, in addition to income below the maximum taxable earnings limit. President Joe Biden has also endorsed the idea of raising taxes for high earners.
How big is the impact? If earnings above $400,000 were taxed starting in 2024, the Social Security trust fund would remain solvent until 2048, according to the Office of the Chief Actuary. But other provisions set forth in Rep. Larson’s bill would actually undo some of that good. If the Social Security 2100 Act were implemented in its entirety, the Social Security trust fund would remain solvent until 2038.
2. Calculating cost-of-living adjustments using the CPI-E
Social Security COLAs protect the buying power of benefits from inflation. Under current law, inflation is measured using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That is problematic because the CPI-W is based on the spending patterns of workers, but workers tend to spend money differently than retirees on Social Security. That makes the CPI-W a poor measure of inflation in this particular situation.
To address that issue, President Biden and numerous other government officials have endorsed the Consumer Price Index for the Elderly (CPI-E) as a replacement for the CPI-W. The CPI-E is based on purchases made by people age 62 and older, and it emphasizes relevant expenses like medical care and housing more heavily than the CPI-W. That theoretically makes the CPI-E a better measure of inflation for seniors.
How big is the impact? If COLAs were based on the CPI-E starting in 2022, the median beneficiary would receive an extra 1% in benefits by 2030, and an extra 2% in benefits by 2050, according to the Social Security Administration. That may not sound like much, but consider it in context. The median benefit paid to retired workers was $1,622 last December, but a 2% increase would have pushed that figure to $1,579. That means the median retired worker would have received an extra $32 during the month, or $384 over the year.
Additionally, if COLAs were based on the CPI-E starting this year, the number of beneficiaries in poverty would be 4% lower by 2030, and 8% lower by 2050. But there is also a downside. If the CPI-E is used to compute COLAs starting in 2024, the Social Security trust fund would be depleted one year earlier (i.e., 2034), according to the Office of the Chief Actuary.
The Social Security Expansion Act addresses both issues
Washington still has plenty of time to resolve the trust fund solvency issue, but the most likely outcome is a collection of many different changes. For instance, the Social Security Expansion Act, introduced by Sen. Bernie Sanders (I-Vt.) and Rep. Peter DeFazio (D-Ore.) comprises nine provisions, including calculating COLAs with the CPI-E and applying Social Security payroll tax to income above $250,000. According to the Office of the Chief Actuary, the Social Security Expansion Act would keep the trust fund solvent for the next 75 years and beyond.
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