Over at National Review Online, I write on how Social Security expansion as proposed by Rep. John Larson and his 200 House co-sponsors and Sen. Bernie Sander’s separate bill may end up disappointing poor retirees, the ones you think would most need the extra benefits.
On paper, plans like the Social Security 2100 Act offer very large benefit increases to very low earners, who make up about the poorest fifth of retirees. The SSA actuarial memos for these plans offer examples showing benefit increases of up to 44%.
But these examples look at individuals who work a full career and receive benefits based on their own earnings. But that’s not always the reality for low-income retirees. Many failed to work a full career; a short working career is the easiest route to a low income in retirement. Others low-wage workers end up being “dually-entitled” in retirement, meaning that they receive a benefit based upon their own earnings plus an additional “auxiliary benefit” based on the earnings of a higher-earning spouse. Their total benefit is capped at half of the higher-earning spouse’s check. Social Security expansion might boost a retirees’ own earned benefit, but in most cases that would simply result in a lower auxiliary benefit. While higher-earning retirees would be eligible for much smaller benefit increases, because these high earners don’t receive auxiliary benefits they might be more likely to receive what they’ve been promised.
Social Security expansion also favors high earners in a another way: they live longer. This counts not just for increases in initial retirement benefits, but also in the higher COLAs that Social Security expansion plans offer.
I’ve argued for boosting benefits for low-income retirees. We’re a rich nation and can afford to keep seniors out of poverty. But since Social Security is a complex program, we should think carefully about how we go about doing it.
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John Larson Proposal (no relation to me, I am Larsen). This is my preliminary finding.
The basics:
Raise the OASI-DI tax from 12.4% to 14.7, phased in 2020 and 2043 at 0.1% per year.
Combine the OASI and DI trust funds and manage the programs as one entity. My computer model does not handle the SS-DI program. I evaluated this proposal;
1. Prorate the increase to the payroll tax between OASI and DI.
2. The increase is 2.3%. Change the current 10.6% OASI tax to 12.9%.
Tax wages above $400K at OSI-DI, not indexed! The current base-cap would continue to be indexed until it reaches $400K.
New benefit for the $400K. New PIA with a 2% replacement rate for this newly taxed wages.
Increase the current 1stt bend replacement rate from 90% to 93%.
Change COLA determination from CPI-W to CPI-E.
Section 104 - Replace the current-law thresholds for federal income taxation of OASDI benefits with a single set of thresholds at $50,000 for single filers and $100,000 for joint filers for taxation of up to 85 percent of OASDI benefits, effective for tax year 2020.
The proposal does not work as reported. I did not use the 4% Wage Growth the SS used. I used the annual rate of change between 1999 and 2019 which was 3.07%. Many would think this would result is lower SS payroll tax revenue and it does. However, the US Treasury rate for ten year is not yet 3%. When the US Treasury Rate or for that matter the return on the trust fund is less than the SSA Wage Growth, the ability for the trust fund to pay future benefits diminishes - No different than your bank account earning 1% while inflation is 2.5%. Wage Growth determines the future SS-OASI benefit of every worker up to age 60 and then it ceases.
The tax on benefits-claw back of benefits currently claws back 5.08% of benefits. The tax was implemented in 1984 and clawed back 1.78%. The $25k and $32K exemptions were not indexed. Raising them to $50K and $100K will reduce the claw back significantly for decades to come.
Based on past wage growth the $400K cap will not be reached until 2056 whereas the proposal scored by the SS is reached early in the 2040's. They use a 4% rate of growth. This of course would make SS worse off due to higher growth in benefits versus growth in the trust fund.
The change in the fits bend replacement rate will in effect raise all benefits immediately by 1% on average. The new higher benefit for minimum benefits is an added cost I did not look at.
In year 2080 I find SS-OASI alone will be $10Trillion in the red. A far different value than the SS.
I call this plan too little, too late.
The single largest difference appears to be that SS assumes the 78% payable benefit in 2034 does not decrease over time. A graph from a SS report done a few years ago shows the payable benefit for SS at 60% by 2060. This is a far cry from the current projection.
The 125 cafeteria plans (employee healthcare cost, HSA's) have exempted from 14.5% to as much as 17.2% of total wages from SS Taxation. Currently 84.6% of wall wages are taxed by Social Security or are exempt from taxation due to 125 cafeteria plans. The most wages with no cap that COULD be taxed by SS is an additional 15.4%.
Removing the cap and taxing the remaining 15.4% of wages would increase SS revenues by 15.4 divided by 84.6 = 18.2%. Increasing the payroll tax from 12.4% to 14.7% is a large tax and adding more wages to be taxed does add a large amount to SS revenue. However, it is insufficient to cover the 40% in 2060.
This is all before taking in the cost of reducing the claw back-taxes on SS benefits and increased benefits do to the new replacement rate of 93% from 90%, higher minimum SS benefit, higher COLA.
Did those who evaluate this proposal forget-ignore?
1. The 125 cafeteria plans?
2. Behavioral changes in how they earn wages, pay for 125 cafeteria plans?
3. Switch to a Roth IRA-401K versus traditional IRA-401K that is taxable when mandatory with-drawls are required?
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