Recent Proposals to Reform Social Security

The options to reform Social Security will have to become more dramatic the longer Congress waits.


With the report last week that the Social Security Administration’s Old-Age and Survivors Insurance Trust Fund will become insolvent in 2033, a year earlier than projected last year, a few notable reforms to the social insurance program have been proposed this Congress to try to address the problem.

The Social Security Expansion Act, sponsored by Senators Bernie Sanders, I-Vermont, and Elizabeth Warren, D-Massachusetts, would create a special investment tax of 12.4% for individuals with $200,000 or more in income and tie Social Security to the Consumer Price Index -E, a measure of inflation that is weighted for the spending habits of the elderly. Lastly, it would increase the Special Minimum Benefit to 125% of the poverty line. The chief actuary for the trust fund estimates this would keep Social Security solvent until 2096.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

A second bill, proposed by Senators Susan Collins, R-Maine, and Sherrod Brown, D-Ohio, called the Social Security Fairness Act, would repeal the Government Pension Offset and the Windfall Elimination Provision, provisions passed in 1979 and 1983, respectively, which reduce Social Security benefits for some workers receiving a public sector pension.

Social Security solvency decreased last year primarily due to inflation, which was higher than expected, and caused an 8.7% CPI adjustment to benefits, when only a 3.8% adjustment had been projected.

Andrew Biggs, a senior fellow at the American Enterprise Institute, remarked that the reforms made to Social Security in 1983 are minor compared to the ones that would need to be made today and also said many of the “easier options” have already been taken, when speaking at a panel hosted by the Committee for a Responsible Federal Budget on Tuesday.

The 1983 reforms included the windfall provision (which the Social Security Fairness Act would repeal), making some Social Security benefits taxable income and increasing the full retirement age from 65 to its present level of 67 over a 22-year period.

Going beyond the proposed bills, Biggs recommends capping the maximum benefit, now approximately $43,000. He says this is not “a real fix” but would help plug the gap without compromising retirement security.

Biggs also cautioned against various means-testing fixes, like removing the cap on income subject to Social Security payroll taxes, without also increasing program benefits to high earners. He said that because those changes could cause Social Security to be perceived as unfairly favoring people with fewer resources, or as a “welfare” program, which could reduce political support for it.

The CRFB offers an online calculator that allows people to plug in various possible Social Security reforms to try to fix the program. Some of these reforms include more common proposals such as raising taxes, reducing benefits on high earners and increasing the retirement age. It also includes some more esoteric ones, such as indexing the retirement age to longevity and reducing CPI calculations.

As things currently stand, after the OASI becomes insolvent, benefits will be paid out on a cash-flow basis and would be reduced to approximately 77% of what they would be if the fund were solvent. Those who are currently 57 would be at full retirement age just as this happens, and this would significantly decrease the retirement security and complicate the retirement planning for many.

Additionally, since Social Security benefit payments would be directly tied to cash inflows, a recession or other increase in unemployment could trigger a sudden further decrease in payments. This could have the effect of further reducing consumer spending by Social Security recipients as their income drops, which could deepen and prolong a recession occurring after Social Security became insolvent.

The Social Security Trust Fund Report strongly recommended that any reforms to Social Security be made sooner rather than later. The report noted that any large changes would take time for the trustees to implement and for recipients to learn about and adjust to. It also explained that increases to taxes and/or reductions in benefits would be less painful if done quickly, because those revenue-balance changes would be in place for longer. Put another way, changes made closer to the insolvency date would have to be more dramatic than any changes that can be made today.

«