The Social Security Guarantee

The promise to guarantee Social Security for all Americans must be kept. AMAC has examined many proposed solutions presented in recent Trustees’ Reports and selected the alternatives we feel are best suited to save Social Security’s retirement trust fund. We have combined these proposals with several other recommendations and our research to achieve the best path to long-term trust fund solvency without raising taxes.

AMAC’s proposal has three Prime Directives:

• Guarantee an annual increase in benefits for all, with emphasis on those with lower earnings, to ensure the program stays true to its mission: keeping seniors out of poverty.
• Guarantee achieving solvency and ensure benefits continue without automatic
• Guarantee all earners the opportunity to create more income available at retirement through work and improved retirement savings programs.

To achieve these prime directives, AMAC proposes the following changes to guarantee Social Security for current and future retirees.

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I. Modify the current annual cost-of-living adjustment (COLA) to provide an equal dollar COLA for all beneficiaries, but not less than a 1% increase in the average benefit each year.

Social Security currently applies the annual cost-of-living adjustment (COLA) on an equal percentage basis. To reinforce Social Security’s mission as an anti-poverty program, AMAC recommends providing an equal-dollar COLA based on the average retirement benefit for retired workers.

This will increase the buying power of retirees below or near the poverty line. At the same time, the lower dollar COLA for higher earners is offset by changing a current law provision that takes benefits away from retirees.

Under current law, the cost-of-living adjustment (COLA) for Social Security benefits every year is based on the third quarter CPI-W of the preceding year. However, in 2009, 2010, and 2015, the COLA calculation did not yield a positive adjustment for the following year, even though expenses most common to seniors (e.g., food, insurance, medical treatment, prescription drugs, etc.) continued to rise sharply.

Under the AMAC Social Security Guarantee plan, all retirees will be guaranteed an equal dollar COLA increase and no longer an equal percentage based on an individual’s Social Security Benefit amount. Moreover, the COLA for any given year will not be less than 1%, as applied to the average retirement benefit. See the chart below for an illustration of this in practice.

The net effect of this change in how COLAs are calculated would be a shifting of a more significant portion of the dollars associated with the annual COLA to middle- and lower-benefit recipients and is consistent with the SSG objective of emphasizing those with lower earnings to keep seniors out of poverty.

The Department of Labor has multiple measures of inflation. Currently, Social Security uses CPI-W, but some proposals have suggested switching to chained CPI or a special measure for seniors called CPI-E. AMAC’s SSG proposes to use chained CPI-U to match other inflation-based changes, such as the annual increase in the marginal income tax brackets.

II. Either eliminate or reduce the taxation of benefits by increasing the income thresholds for taxation of Social Security benefits to exempt middle-class seniors benefits and index the thresholds for inflation.

When Congress began taxing Social Security benefits in 1983, the threshold amounts were not indexed for inflation. As a result, what was once a high income for the average retiree is now low enough that more than half of retiree households pay taxes on their Social Security benefits. As incomes rise, more and more seniors face the prospect of paying federal income tax on their earned benefits.

The table below shows the current and proposed income thresholds if elimination is not possible:

Further, we recommend that future versions of this problem be averted by indexing these thresholds to chained CPI to match other indexing features of the tax code.

III. Guarantee solvency and continue benefits without automatic cuts.

We are evaluating various options to conserve Social Security’s financial resources in the long term, including relatively minor adjustments to benefit calculations for high earners that would result in program savings. For example:

a. For higher earners, modify the primary insurance amount (PIA) calculation so  that more of the average indexed monthly earnings for retirees are moved to the lower percentage tiers (progressive price indexing).

Social Security currently uses average wage indexing (AWI) to adjust the bend points used in the Primary Insurance Amount (PIA) calculation each year. Historically, AWIs have increased more rapidly than inflation. In 2023, AWI increased by 8.89%, compared to an inflation rate of 6.25%. The recommendation calls for how the Average Indexed Monthly Earnings (AIMEs) for those above the 50th percentile to be adjusted using inflation rates instead of AWI.

The net effect of this recommended change would be a lowering of the benefit calculated for higher earners, primarily by moving more of their average earnings away from the first (90%) bend point to the bend points that generate lesser portions of the calculated benefit (the 32% and 15% portions). It tends to further extend Social Security’s inherent means testing and would further reduce the income inequality problem plaguing the American economy.

b. Increase the number of years of indexed earnings used to calculate the career average earnings.

Social Security retirement benefits are based on earnings history, currently using 35 “computation years” to develop an average indexed monthly earnings (AIME) figure for use as the base for determining a retiree’s primary insurance amount (PIA). The PIA is the base benefit amount at full retirement age. These computation years are the highest indexed earning years in the worker’s history and, since Social Security assumes a 40-year work history as the norm, taking the highest 35 earnings years in effect “drops out” five lower earning years resulting in a higher AIME.

A change in the number of computation years used to calculate PIA would be more reflective of current earnings histories and a more appropriate way of determining a retiree’s primary insurance amount (the monthly benefit they can expect to receive from Social Security at retirement). Recognizing that those with lower career average earnings would be affected more severely, the increase in computation years would be restricted to beneficiaries with higher average earning histories.

The net effect of this recommendation is a reduction in average career earnings by including additional lower-earning years in the AIME calculation.  

IV. For those beneficiaries below the annual Social Security maximum, increase the benefit available to surviving spouses to receive up to 75% of their deceased spouse’s benefits.

Currently, surviving spouses receive the higher of the two benefits held by either partner, which results in a lower household benefit payment for those who may still have the same bills and added expenses. This provision would have the surviving spouse receive an amount equal to the lower of the two benefits plus 75% of the higher benefit amount. It would apply to only those having a benefit less than the maximum Social Security benefit.

Example: Spouse A receives a monthly benefit of $2000, and spouse B receives $1000. Currently, if spouse A dies, spouse B receives the $2000 benefit, resulting in a household benefit reduction of

$1000. This proposal would result in the surviving spouse receiving $2500 (75% of the higher benefit,

$2000, added to the lower benefit, $1000). Under this proposal, the household would only see a reduction of $500.

V. Guarantee all earners have access to more income at retirement through work and improved retirement savings programs.

a. Eliminate the Social Security Earnings Test

The Social Security Earnings Test severely limits the ability of early retirees to earn income without having their benefits reduced. Because of this provision, many older Americans are forced out of the workplace when they would otherwise continue contributing to the economy. SSG recommends removing this provision to allow early retirees to increase their earnings while receiving Social Security benefits.

Social Security regulations stipulate that upon beginning retirement, spousal, or survivor benefits, beneficiaries are considered “retired.” These regulations allow for continued earning from employment, but there is a limit to how much a worker can earn and continue to receive full benefits in a given year. Annually, Social Security sets a limit for how much recipients of early benefits may earn before those benefits are reduced. The limit increases each year based on changes to the National Average Wage Index, with the 2023 limit set at $21,240. Exceeding that limit will trigger a reduction of $1 for every $2 earned over the limit, causing an impact on benefit payments.

From Social Security’s revenue perspective, limiting the earnings of retirees reduces payroll taxes. Eliminating this provision would allow retirees to earn more and pay more into the program via FICA taxes.

b. Improve existing supplemental voluntary after-tax savings programs for all earners to facilitate the availability of more income at retirement.

The US savings rate is at historic lows, and many Americans in retirement do not have the savings to help them through unforeseen events that many are forced to deal with. The Secure Act 2.0 provided for auto-enroll 401k for many workers, and will help Americans save more, taking pressure off the current system.

Common sense adjustments to improve the Secure Act 2.0 in this regard should be considered, including increasing portability and making Roth conversions easier.