The Social Security Guarantee
The promise to guarantee Social Security for all Americans must be kept. With the Social Security Administration’s recurrent warnings of impending insolvency, now projected to be reality in about eight years, the need for reform measures is rapidly gaining recognition in many quarters, and the sense of urgency increases steadily as the point of being unable to pay full promised benefits draws closer.
AMAC has conducted years of careful research into Social Security’s long-term financial plight, culminating in the development of our Social Security Guarantee (SSG). AMAC’s work on a solution to Social Security’s long-term insolvency problem has, from the very beginning, focused on 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 cuts.
- Guarantee all earners the opportunity to create more income available at retirement through work and improved retirement savings programs.
The specific recommendations included in the AMAC SSG are summarized in this document. A complete proposal, presenting background information on the insolvency problem, a slate of options for policy-maker consideration, and additional details on the SSG recommendations, is available here in PDF format.
The AMAC Social Security Guarantee Recommendations
1. 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 annual cost-of-living adjustment (COLA) for Social Security benefits 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. The chart below illustrates this approach 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, 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 based on the Consumer Price Index (CPI).. 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.
2. 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.
Taxing Social Security benefits is a frequently recurring item in discussions on the program’s need for reform. The threshold amounts were not indexed for inflation when Congress began taxing Social Security benefits in 1983 and, 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. While AMAC supports completely eliminating this taxation, a compromise position is to increase the threshold where benefits become part of the income tax liability calculation.
If fully eliminating taxation is not possible, AMAC’s SSG proposes the following changes:
Current and Proposed Income Thresholds for Taxation of Social Security Benefits
| Up to 50% of benefits included in taxable income | Up to 85% of benefits included in taxable income | |||
|---|---|---|---|---|
| Filing Status | Current | Proposed | Current | Proposed |
| Single | $25,000 | $50,000 | $34,000 | $75,000 |
| Married Filing Jointly | $32,000 | $100,000 | $44,000 | $150,000 |
Further, our SSG proposes that these thresholds be indexed to the chained CPI to match other indexing features of the tax code.
3. Guarantee solvency and continue benefits without automatic cuts.
We have evaluated various options to conserve Social Security’s financial resources in the long term. Our SSG proposes a series of program adjustments to better align with 21st Century economics and evolving workforce demographics. These include:
3a.Gradually increasing the normal (full) retirement age over time; retaining age 62 as the early retirement age and eliminating delayed retirement credits.
Life expectancy has improved substantially since Social Security was designed nine decades ago. Consequently, retirement benefits need to be paid for much longer than originally intended. In light of this, our SSG recommends adjusting the normal (full) retirement age (NRA) from 67 to 70 over a period of 12 years, beginning at a point that shields those within 10 years of age 62 from any effect of the change. With an assumed 2026 implementation, this change would affect beneficiaries reaching age 62 in 2036, annually increasing NRA by three months until reaching age 70 for those attaining age 62 in 2048. With this change, monthly benefits would be maximized at age 70 as they are now. Beneficiaries enrolled in Social Security prior to 2036 would not be affected. SSG also recommends adoption of a regular review of NRA via a formula that keeps the ratio of life expectancy/NRA intact and consistent with changes in longevity.
3b. For higher earners, modify the primary insurance amount (PIA) calculation so that more of the average indexed monthly earnings (AIME) for retirees are moved to the lower percentage tiers (progressive price indexing).
Social Security currently uses average wage indexing (AWI) to adjust the factors used to calculate a newly eligible beneficiary’s Primary Insurance Amount (PIA). Historically, AWIs have increased more rapidly than inflation. For example, the AWI increased by 8.89% in 2023, compared to an inflation rate of 6.25%. Consequently, growth in base benefit amounts (PIA) for new retirees exceeded the level of inflation.
Our SSG recommends adjusting the PIA calculation for those with AIMEs above the 50th percentile to be adjusted using inflation rates instead of AWI. The net effect of this change would be a slight lowering of the benefit calculated for higher earners, further extending Social Security’s inherent means testing and further reducing the income inequality problem plaguing the American economy.
3c. Increase the number of years of indexed earnings used to calculate career average earnings.
Social Security retirement benefits are based on earnings history, currently using the highest 35 years of inflation-adjusted earnings to determine a retiree’s basic NRA benefit—their primary insurance amount (PIA) at full retirement. 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.
An increase in the number of years used to calculate PIA, from 35 to 38, would be more reflective of current work histories and a more appropriate way of determining a retiree’s primary insurance amount. Recognizing that those with lower career average earnings, as well as those with zero earnings years, would be affected more severely, the increase in computation years would be restricted to beneficiaries with higher average earning histories.
3d. Increase the taxable maximum to ensure that 90% of workforce earnings are subjected to the FICA/SECA taxation.
The proportion of the U.S. workforce payroll not subject to FICA/SECA tax has grown from the 10% projected in 1983 to an estimated 17.5%. In other words, about 7.5% of the total workforce payroll assumed to be subject to FICA taxation is escaping this levy. This loss of anticipated tax revenue is a primary reason for the trust fund full depletion projections moving from 2056 to 2033.
A series of annual increases to the OASDI taxable maximum earnings subject to FICA/SECA tax would advance the taxable maximum to the level targeted in the 1983 amendments (90%) and would restore this loss of Social Security revenue. We recommend adding 2% to the annual OASDI taxable maximum NAWI adjustment. Over time, this would raise the taxable maximum ($176,100 in 2025) to a level more consistent with previous assumptions. Including the additional earnings in the benefit calculation would help maintain a connection between earnings and eventual benefits.
4. For beneficiaries with incomes below the thresholds for income taxation, increase the benefit available to surviving spouses.
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 taxable income level less than the threshold for income taxation proposed in item II.
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.
5. Guarantee all earners have access to more income at retirement through work and improved retirement savings programs.
5a. 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 adjusts this limit based on the National Average Wage Index.
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, and would eliminate a substantial coordination and reporting burden faced by workers and Social Security Administration staff.
5b. Improve existing supplemental voluntary after-tax savings programs for all earners to facilitate the availability of more income at retirement.
The recently enacted Secure 2.0 Act substantially improved retirement savings options, with provisions to promote savings and increase flexibility for those saving for retirement. AMAC has long recognized the importance of increasing workers’ ability to accumulate savings to augment their cash flow in retirement and after claiming Social Security benefits. Both AMAC and Secure 2.0 recognize this measure of financial health in retirement as being critical to retirees’ ability to meet financial obligations and survive through economic downturns.
In keeping with these general objectives, and as an extension of the Secure 2.0 Act’s provisions, our SSG recommendations include a new benefit that would help and encourage workers to secure a financially sufficient retirement. Specifically, through creation of an Early Retirement Account (ERA) structured as a voluntary, supplemental savings vehicle with preferred tax provisions and built-in portability, wealth accumulation could develop under the guidance of investment experts.
CONCLUSION
The goal of AMAC’s Social Security Guarantee is to preserve the program for current beneficiaries and to modernize it for successive generations. AMAC’s plan is balanced and singles out no group with excessive changes. We are also confident that our blueprint, presented here as a whole, will extend the solvency of the program and prevent across the board cuts.
Note that these recommendations are interlocking to achieve the full elimination of the projected funding shortfall. Caution must be taken to not “pluck” only one or two items out for passage. For example, if Congress were to only lessen income tax on benefits and/or only enhance survivor benefits, solvency would be exacerbated, as these two items would have a “cost” rather than a “savings” to the Social Security Trust Fund.
Gerry Hafer
Social Security Advisor
[email protected]
