The Social Security program provides monthly income to nearly 20% of Americans and has lifted 26.3 million people out of poverty by 2021, according to the Census Bureau. However, the program also faces several major problems, and two of the most pressing concerns concern the solvency of trust funds and the purchasing 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 depletion of trust funds by 2035. At that point, payroll taxes would only cover 80% of planned benefits. In addition, many policy experts believe that benefits are lagging behind inflation. In fact, the Senior Citizens League says the benefits have lost 40% of their purchasing power since January 2000.
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Government officials in Washington have proposed numerous changes to address these issues. Two of the most common are increasing Social Security payroll taxes and changing the formula used to calculate annual cost of living adjustments (COLAs). But how much will those changes actually help? Here’s what retired workers need to know.
1. Increase in social security payroll tax
The current law limits the amount of income that can be taxed by the Social Security program. The maximum taxable profit limit is $147,000 in 2022, meaning anything above that threshold is not subject to Social Security payroll taxes. For context, about 19% of income exceeded the taxable limit last year, so several politicians have proposed expanding the Social Security payroll tax.
Thus, Rep. John Larson (D-Conn.) passed the Social Security 2100 Act last year. Among other things, the bill would apply Social Security payroll taxes to income above $400,000, in addition to income below the maximum taxable income limit. President Joe Biden has also endorsed the idea of raising taxes on high earners.
How big is the impact? If income above $400,000 were taxed from 2024, the Social Security trust fund would remain solvent until 2048, according to the chief actuary’s office. But other provisions in Rep. Larson would undo some of that good. If the Social Security Act 2100 were implemented in its entirety, the Social Security Trust Fund would remain solvent until 2038.
2. Calculating the cost of living using the CPI-E
Social Security COLAs protect the purchasing power of benefits from inflation. Under current legislation, inflation is measured using the consumer price index for urban wage earners and white-collar workers (CPI-W). That’s problematic because the CPI-W is based on employees’ spending habits, but employees 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 problem, President Biden and a host of other government officials have approved 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 aged 62 and older and places more emphasis on relevant expenses such as medical care and housing than the CPI-W. That, in theory, makes the CPI-E a better measure of inflation for seniors.
How big is the impact? If COLAs were based on the CPI-E as of 2022, the average beneficiary would receive 1% additional benefits by 2030 and 2% additional 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 brought that figure to $1,579. That means the average retired worker would have received an additional $32 during the month, or $384 over the year.
In addition, if COLAs were based on the CPI-E from this year, the number of beneficiaries in poverty would be 4% lower by 2030 and 8% by 2050. But there is also a downside. If the CPI-E is used to calculate COLAs as of 2024, the Social Security trust fund would have been depleted a year earlier (i.e. 2034), according to the chief actuary’s office.
The Social Security Extension Act addresses both issues
Washington still has plenty of time to resolve the trust fund’s solvency problem, but the most likely outcome is a collection of many different changes. The Social Security Expansion Act, enacted by Sen. Bernie Sanders (I-Vt.) and Rep. For example, Peter DeFazio (D-Ore.) includes nine provisions, including calculating COLAs with the CPI-E and applying the Social Security payroll tax to income over $250,000. According to the chief actuary’s office, the Social Security Extension Act would keep the trust fund solvent for the next 75 years and beyond.
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