The 1929 stock market crash and the ensuing Great Depression left many older Americans in poverty. In fact, in 1934, more than half of seniors did not have the income they need to support themselves, prompting a number of states to introduce old-age retirement programs. But those state-run systems were largely ineffective, and most quickly disappeared when the Social Security Act was signed in 1935.
Today, 88% of Americans age 65 and older receive Social Security benefits, and more than half of retirees say those benefits are a major source of income. While the program has undoubtedly lifted many seniors out of poverty, the Social Security program unfortunately needs to be reformed.
Here are three major changes proposed by various politicians in Washington.
1. Apply job application tax to more income
Falling birth rates and longer life expectancy have created a problem for the Social Security program as beneficiaries represent a slightly larger proportion of the total population each year. In fact, the employee-to-beneficiary ratio is currently at 2.8, down from 5.1 in 1960, and that figure is expected to drop to 2.3 by 2035. In other words, the number of employees paying taxes to the program for social security is shrinking compared to the number of seniors receiving benefits. That trend is unsustainable.
With that in mind, the Social Security Board of Trustees estimates that the Old Age and Survivor Insurance Trust Fund (OASI) — which funds pensions and survivor benefits — will be dry by 2034. At that time, the program would be completely dependent on tax revenues, but according to the trustees, taxes would only cover 77% of the planned distributions by 2034.
Earlier this year, Sen. Bernie Sanders (I-Vt.) and Rep. Peter DeFazio (D-Ore.) a possible solution: the Social Security Expansion Act. Among other things, the bill would apply Social Security payroll taxes to all income above $250,000, a dramatic departure from the current system, which limits the maximum taxable income to $147,000. The Social Security Expansion Act would also tax the investment and corporate income of millionaires and billionaires to further boost funding for the program.
Collectively, these changes would extend the solvency of the OASI trust fund by an estimated 75 years, while increasing Social Security benefits by an estimated $2,400 per year.
2. Review the Formula Used to Calculate COLAs
Since 1975, cost of living adjustments (COLAs) have been used to keep Social Security benefits in line with inflation. Those COLAs are currently based on changes in the consumer price index for urban wage earners and white-collar workers (CPI-W), a measure based on purchases made by office workers and other wage earners. Unfortunately, the CPI-W is a poor approximation of senior spending habits.
Seniors, in particular, tend to spend more on medical care, prescription drugs and housing, while those of working age spend more on education, clothing and transportation. That means the CPI-W doesn’t emphasize enough on the spending categories most relevant to seniors, and that has resulted in Social Security benefits losing 40% of their purchasing power over the past two decades, according to The Senior Citizens League.
The Social Security Extension Act contains a provision to tackle this problem. The bill provides that inflation would be measured using the Consumer Price Index for Older People (CPI-E), a measure based on purchases made by individuals aged 62 and older.
For context, The Senior Citizens League estimates that the CPI-E exceeds the CPI-W by two-tenths of a percentage point on average, and while that seems like a small number, the power of compounding would make it quite significant over time. For example, if COLAs had been calculated using the CPI-E over the past two decades, the average retired worker would have received an additional $5,800 in retirement benefits.
3. Increase payments to long-lived beneficiaries
Seniors tend to incur higher costs as they age, especially when it comes to medical care and prescription drugs. To that end, President Joe Biden has proposed increasing the Social Security income paid to long-lived beneficiaries. His plan would increase benefits by 1% per year for seniors between the ages of 78 and 82, resulting in a 5% cumulative increase for individuals who have received retirement benefits for 20 years.
None of the revisions discussed in this article have yet been implemented, but seniors should stay informed about potential changes to the Social Security program as they could have a dramatic impact on financial well-being.