This Highly Popular Social Security Proposal Is Back and It May Pass the House

This Highly Popular Social Security Proposal Is Back and It May Pass the House

With more than 200 co-sponsors, the third time could be the charm for this Social Security reform bill.

Sean Williams
(TMFUltraLong)
Feb 10, 2019 at 7:06AM


This may come as little surprise to many of you, but America's most important social program is on the verge of big problems.

Although Social Security is currently keeping more than 22 million people out of poverty, its ability to provide a financial foundation for retired workers, the long-term disabled, and the survivors of deceased workers could soon be compromised.

According to the 2018 report from the Social Security Board of Trustees, ongoing demographic changes that include the retirement of baby boomers, increased longevity over many decades, growing income inequality, and lower recent fertility rates will push the program from generating net cash surpluses to net cash outflows very soon.

The good news is that there's nearly $2.9 trillion in asset reserves to help counteract these outflows for a period of time. However, by 2034, the entirety of this $2.9 trillion in excess cash is projected to be gone.

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If Social Security were to completely exhaust its asset reserves, it wouldn't go bankrupt or be insolvent. But it does signify the unsustainability of the existing payout schedule. With no excess assets, Social Security would be forced to reduce its monthly payouts to eligible beneficiaries by as much as 21% between 2034 and 2092, assuming Congress fails to raise additional revenue or cut expenditures. On a total dollar basis, the Trustees estimate the program will run a $13.2 trillion deficit between 2034 and 2092 -- a deficit that's widening each year it's not dealt with.

Clearly, something should be done to resolve Social Security's impending cash crunch. The big question has always been what that something should be. The answer may have been laid out this past week.

The Social Security 2100 Act is back, with a lot of support

Rep. John Larson, D-CT, first introduced Americans to the Social Security 2100 Act back in 2014, with his proposal gaining limelight but little support in Congress. It was then reintroduced in 2017 with the support of 156 Democrats in the House, but again with no formal vote on the House floor. Now, with Democrats in control of the House and more than 200 members of Larson's own party acting as sponsors, the Social Security 2100 Act is back -- and this time it could make some noise.

The Social Security 2100 Act aims to raise revenue such that no benefit cuts need to be made over the long term (i.e., the next 75 years). It also intends to expand benefits for current and future beneficiaries. According to Chief Actuary Stephen Goss, the estimated $13.2 trillion budget deficit between 2034 and 2092 would be replaced by a $2.1 trillion net surplus -- a $15.3 trillion swing.

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What exactly does the Social Security 2100 Act entail? Let's take a closer look at its seven key action points.

1. An increase in the primary insurance amount (PIA) formula factor to 93% from 90% beginning in 2020: Increasing the PIA formula amount would have a small but positive upward impact on what seniors are paid from the program.
2. Switch COLA calculation to CPI-E from CPI-W: The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the program's inflationary tether since 1975. But since it tracks the spending habits of working-age urban and clerical workers, rather than seniors who represent a majority of beneficiaries, it results in the underweighting of important spending categories for seniors, such as medical care and housing -- and therefore, a lower cost-of-living adjustment (COLA). The Consumer Price Index for the Elderly (CPI-E) adjusts this by tethering COLA increases to the spending habits of households with seniors aged 62 and up.
3. Increase the special minimum PIA for newly eligible retired or disabled workers beginning in 2020: Providing a special minimum primary insurance amount is a fancy way of saying that minimum benefits paid out by the program would be increased. The current minimum benefit pays out well below the poverty level, so this is a direct attempt to reduce elderly and disabled poverty rates.
4. Adjust the taxation of Social Security benefit thresholds beginning in 2020: The taxation of Social Security benefits was introduced in 1983 and expanded in 1993. It allows up to 50% of benefits to be taxed for a single taxpayer whose adjusted gross income (AGI) plus one-half of benefits exceeds $25,000 (or $32,000 for a couple filing jointly). Up to 85% of benefits become taxable when AGI plus one-half of benefits tops $34,000 for a single filer or $44,000 for a couple filing jointly. These income thresholds have never been adjusted for inflation. The Social Security 2100 Act would increase this threshold and create a single taxation point of up to 85% for single filers and joint filers above $50,000 and $100,000, respectively.
5. Reinstitute the payroll tax on earned income above $400,000: Currently, all earned income between $0.01 and $132,900 is subject to Social Security's 12.4% payroll tax, with any earned income above $132,900 exempt from the payroll tax. Larson's proposal aims to create a moratorium on taxation between $132,900 and $400,000, with the 12.4% payroll tax once again reinstituted on earned income above $400,000. Over time, this moratorium figure would shrink and eventually disappear, since the current cap of $132,900 increases in-step with the National Average Wage Index each year (as long as COLA is a positive number).
6. Gradually increase the payroll tax for all workers to 14.8%: Over the next 24 years, the Social Security Act would increase the payroll tax by 0.1% per year, pushing it from 12.4% to 14.8%. Keep in mind that only the self-employed pay the full payroll tax rate. If you're employed by someone else, your employer covers half of your liability. This would mean a 0.05% increase per year, or a 1.2% aggregate increase over 24 years for most workers.
7. Combine the OASI and DI Trusts into one fund: Lastly, and mostly for simplicity, the Old-Age and Survivors Insurance Trust (OASI) and Disability Insurance Trust (DI) would be combined into a single trust, the OASDI.

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A workable solution with one key problem

On the surface, the Social Security Act does everything you'd want to see a proposal do. It ensures that benefits aren't cut for current or future retirees, expands benefits for those at the lowest rung of the income ladder, and helps to simplify the program. With more than 200 co-sponsors of the bill in the House, only 218 votes needed for passage, and Rep. Larson set to become chairman of the Ways and Means subcommittee on Social Security, passage of the Social Security 2100 Act in the House appears quite possible.

But there's just one problem: A bill needs to pass both houses of Congress and affix a president's signature (in most cases) to become law.

The Senate is still under control of the Republican Party, which frankly views a solution to Social Security's imminent cash crunch differently. Rather than increasing or amending the payroll tax cap, the GOP prefers gradually raising the full retirement ageto account for increased longevity.

Your full retirement age is the age at which you become eligible to receive your full monthly payout, as determined by your birth year. Currently set to peak at age 67 for those born in 1960 or later, Republicans have proposed gradually increasing this to as high as age 70. This would require future generations of workers to wait longer to receive their full benefit or to accept a steeper monthly payout reduction by claiming earlier. Either way, it reduces lifetime benefit payouts, thereby saving the program money.

Republicans also prefer the Chained CPI as a measure of inflation, rather than the CPI-E. The Chained CPI, which is already being indexed to federal income tax brackets and credits, takes into account the idea of substitution bias. If, for instance, the price of one good, say ground beef, has risen sharply in price, the Chained CPI assumes that consumers will trade down to less-costly but similar food, such as chicken or pork. If the Chained CPI were implemented, lower COLAs would likely ensue, also saving the program money over the long run.

https://g.foolcdn.com/image/?url=htt...=700&op=resizeIMAGE SOURCE: OFFICIAL WHITE HOUSE PHOTO BY ANDREA HANKS.

To boot, President Trump would be averse to signing legislation that makes direct changes to Social Security. Trump has opined that implementing direct changes to Social Security is akin to political suicide, without using those exact words. Rather, the president is leaning on his hallmark Tax Cuts and Jobs Act to create jobs, grow wages, and generate more in the way of payroll tax revenue. In essence, Trump favors indirect fixes to Social Security.

What we're ultimately left with is an abundance of simple to complex solutions to fix Social Security. Many of them work, but they're essentially all one-sided in terms of support.

Considering that 60 votes are needed in the Senate for the passage of any amendments to Social Security, a bipartisan approach is going to be needed for any real change to occur. In other words, even if the Social Security 2100 Act passes the House, it's dead on arrival once it reaches the Senate.

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