Ask the Advisor: December 2016

Ask the Advisor: December 2016

How Can We Expand Social Security When The Program Is Running Out of Money?

Q: I’ve read about proposals to “expand” Social Security that would provide somewhat higher benefits and a better cost-of-living adjustment.  How can Social Security be expanded when the program is running out of money?

A:  When it comes to strengthening Social Security’s finances, Members of Congress only have two choices — to cut spending on benefits, or increase program revenues. Typically in the past, the focus has been on proposals that would cut benefits rather than raising revenues.  Proponents of cuts argue that benefits must be cut because Social Security is insolvent as currently structured.  They point to the fact that there are fewer workers to provide payroll tax revenues for swelling number of retirees.

But with low growth in Social Security benefits, rapidly growing healthcare costs, and more people living longer in retirement, that argument has little support among the public.  A March 2016, Pew Research survey found that 71% of Americans believe benefits “should not be reduced” while only 26% say that “cuts should be considered.”

This year, for the first time in decades, “expanding” Social Security became the platform of a major political party — the Democrats — while both presidential candidates, Clinton and Trump, expressed opposition to any benefit cuts.  And lending credibility to the claims, legislation is pending in both the Senate and the House that would provide a boost to Social Security benefits and use a “seniors” CPI, the Consumer Price Index for the Elderly (CPI-E), to determine the annual cost-of-living adjustment (COLA).  The legislation would finance doing this by lifting the payroll taxable maximum — which is currently capped in 2016 at the first $118,500 in earnings.

Unlike the rest of our tax system, which is progressive, meaning the lower the income, the lower the tax rate that people must pay— Social Security payroll taxes are regressive.  The first dollar of earnings is taxed for Social Security, and all workers pay 6.2% tax on earnings— an amount that is matched by employers — but only on the first $118,500 in earnings.  But because of the taxable maximum cap, the highest paid workers, like CEOs of major corporations who receive millions in wages and even Member of Congress, are pocketing a huge tax break, 6.2% of every dollar earned over $118,500.

Estimates by the Social Security Administration indicate that if the taxable maximum were eliminated, and the payroll tax of 12.4% were applied to all earnings, that program solvency would be extended as much as 40 years.  This includes allowing retired workers credit for benefits on the higher earnings.  And not only would lifting the taxable maximum keep the program financed well into future, it would pay for providing a more fair and slightly higher COLA using the CPI-E.

Expanding Social Security by ensuring fair payroll tax policies can not only ensure Social Security solvency for years to come, but can help people enjoy a more comfortable retirement without deep benefit cuts.