In what amounted to a slight surprise in Congress because of the ongoing political divide, a remarkable piece of legislation – The Social Security 2100 Act – was introduced by Representative John Larson (D-CT). The act is aimed at solving one of the biggest issues facing the government and Americans: the funding shortage for Social Security. The bill was introduced with more than 200 cosponsors and appears to have a good deal of broad support. The bill does a lot right, but also misses one of the biggest issues around Social Security today – ill-informed decision making.
Why The Bill Is Important
The pending Social Security funding shortfall has mostly been put to the side in recent years. Social Security remains the bedrock of American retirement, with roughly one-third of all retirees relying on Social Security as their only real source of retirement income and roughly 60 percent of Americans relying on Social Security for more than 50 percent of their retirement income.
Furthermore, it’s the government’s single largest expenditure and over 90 percent of the workforce pays into the system. A shortfall is expected around year 2034, making the funding issue harder to fix with every year Congress doesn’t act. But then again, when have we known the government to fix an issue a decade or more ahead of when it breaks?
What The Bill Does Right
The new legislation would do a number of things:
- Change benefits
It would increase benefits for those who have paid into the system almost across the board. Overall, the benefit increase would be around 2 percent of the average benefit. Lower wage earners would see the biggest increase in benefits. The minimum benefit would be set at 25 percent above the poverty line, ensuring a safety net for workers in retirement and continuing the initial purpose of Social Security – to provide a floor of income for keeping retired lower-end earners out of poverty.
- Update cost-of-living adjustments
Additionally, the cost-of-living adjustments would be updated to ensure the system tracks retirees’ spending needs. Currently the system relies on the CPI-W, which tracks worker spending. The act would adopt the CPI-E, which would better reflect the spending habits of seniors. The taxation of Social Security benefits would be updated, reducing a tax burden on many in retirement.
- Fix funding issues
Lastly, and most importantly, the bill would fix the funding issues. The system is called Social Security – the key word being Security. Social Security benefits create a floor of income for those who pay into the system that lasts for life. This should bring a sense of security to the recipients, knowing they have a steady, inflation-adjusted and lifetime income source in retirement.
The new means for funding the Social Security system would be to tax high income earners on wages over $400,000. The tax would only impact the top 0.4 percent of wage earners but would bring in significant revenue. Currently, Social Security taxes stop at roughly wages of $132,900. The new system would essentially start the tax back up again at $400,000. It is not entirely clear if this provision – crucial to the bill’s success – will garner support on both sides of the political aisle.
What The Bill Is Still Missing
The biggest issue the Social Security 2100 act doesn’t address is claiming decisions. Far too many Americans claim Social Security benefits before their full retirement age, causing a huge and permanent reduction in their benefits and lower retirement security. In some cases, claiming benefits early results in incentives so it is crucial to be informed. The government should do more to encourage people to stay in the workforce longer and defer Social Security benefits out further. One option would be to delay the earliest you can claim benefits, which is currently set at age 62.
Another option would be to have required counseling before someone claims benefits. This is similar to what is done with the reverse mortgage HECM program and other types of government loans. While staffing such an endeavor could be challenging, modernizing the technology and systems of Social Security in a bill aimed at fixing the system to 2100 would make sense. The education or counseling could be set up as a computer software program or other form.
Fixing the underlying funding issues of Social Security is crucial, but we also need to support better and smarter decisions around Social Security claiming. We know many people are not making the best decisions, and this should be addressed to paint a more secure retirement picture for Americans. Ultimately, the bill is a huge step forward. It would significantly improve the status of Social Security – if it can make its way through Congress.