Depending on how the election turns out, there could be an opportunity to improve Social Security benefits for Americans, in several ways.
Contributor: Buddy Robinson
Social Security is great, but it could be even better. The benefits could be increased, if Congress was willing to do it. There are a number of good ideas on how to do this, as well as how to pay for it.
Social Security is one of the most important and most popular programs ever created by our federal government. It is the main source of income for most retired Americans. It is also keeping 15 million of them above the poverty line.
On top of that, it is sustaining millions of disabled people, as well as widows and orphans. In all, 59 million Americans – almost 20 per cent of the country – are receiving Social Security benefits.
However, the actual benefits that people receive are relatively modest, compared to what other wealthy democracies give to their retirees. We could afford to do much better, if the political will was there.
This is all the more important now that traditional fixed pensions are fast fading into history, and many people can't afford to put much away into savings.
A number of proposals have been floated in Congress to improve benefits, but none of these have passed, because of opposition from conservatives. Here are some of the policy ideas that would result in bigger benefits:
Change the formula for the annual Cost Of Living Adjustment (COLA). The current COLA uses statistics of price inflation on a generalized view of consumer needs and purchases, which does not match what most retires have to buy.
In other words, things like mortgage rates and the price of gas, which are not much of an expense for most retirees, have very small inflation increases compared to big purchases for retirees like health care and food.
The correct formula that is needed already exists! It's called the CPI-E for: Consumer Price Index – Elderly. All we need is for Congress to switch to this formula for the Social Security COLA.
The second idea is: Adjust the formula that is used to calculate your initial benefit when you first go on Social Security. Back in the 1980's, the initial benefit was supposed to provide a person who had worked at average wages with a retirement benefit of 42 per cent of their previous wages.
Today, that percent for average initial benefits has slipped down, to around 39 to 40 per cent. This is because the spectrum of wages in our country has gradually become more skewed and unequal, with a small number earning high wages, and a much large number earning lower wages.
So. adjusting the formula for the initial benefit could correct this. Going even further, it could be adjusted to give a notably higher percentage of previous wages, above the original 42 per cent target.
A variation of this idea is to simply give a certain dollar amount boost to people's benefits, either across the board or up to a certain annual income level.
A third idea would help a segment of the population which suffers from lower than average Social Security benefits: People who drop out of the work force, or reduce their hours, in order to stay home and care for a spouse or loved one.
When these people drop out of employment prematurely, they are stunting their employment wage record, which is the key information used to calculate their Social Security benefit when they start collecting it. So, they end up with a lower benefit than if they hadn't needed to stop working to care for a loved one.
The proposal to remedy this is to give them a “virtual credit” on their wage history once they reduce or end their paid employment, in order to keep building up that wage history for the purpose of calculating their Social Security benefit. That way, when they start collecting it, it will be bigger than it would have been otherwise.
This idea is especially justified when you consider that by taking care of their loved ones, they are very likely saving the government money that would be spent on professional in-home care or a nursing home.
A fourth idea is to let young people who collect Social Security Survivor benefits (because a parent died) keep collecting them up to age 22 – instead of the current limit of age 18 – as long as they are students in post-secondary education. This isn't a radical idea. It actually used to be the law, from 1965 to 1981. It helped many orphaned young people go through college.
Now: How to pay for these extra benefits? First, let's note that Social Security needs a bump-up in funding just to make sure that the current level of benefits will be there in full when today's young people retire. The easy fix for that is to “scrap the cap” – that is, remove the limit of $137,700/year on wages that are subject to the Social Security payroll tax. That way, all wages will be taxed at the same equal amount of 6.2 per cent, which is fair.
As for the improved benefits that we have been talking about above, one logical way to do that is put a tax on “unearned income” above a certain annual amount, say $100,000 for example. This means that stock and bond dividends and capital gains of the very wealthy – but not those of middle class Americans -- will help pay for benefits.
An alternate method to get the extra funding would be to make the payroll tax progressive (higher tax rate for higher wages, instead of a flat rate).
This election season, look for candidates who will promise to help make these reasonable, needed improvements.
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