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Proposing a change to Social Security in light of COVID-19's Effect on Jobs

This current situation, and what the future may bring, is completely unknown. When we turn the corner, and we will, putting people back to work will be one of the biggest challenges. Here's my thought...

 

What if the SSA lowered the age for obtaining 100% of benefits from 70 to 62? That way, many of us needing to work until the maximum age will be able to retire earlier, opening up needed jobs for our children and grandchildren.

 

I believe that what I propose, coupled with not having a cap for SS taxes on higher wage-earners, will help us get out of this crisis faster. 

 

Who is with me?

 

Thank you for listening. 

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@dfox78 wrote:

Who is with me?

 

 


How much do you know about how Social Security works?  The actual benefit computation, why there is a cap now and how it relates to benefits, the current (well, up to now)  financial health of the Trust Fund.

 

Let me ask you a few questions before anybody commits to being "with you" -

Should our Social Security system be an insurance type program or a charity program - should it be "means" tested???

 

 

 

It's Always Something . . . . Roseanna Roseannadanna
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We are living through something that will fundamentally change everyone's lives. There is going to be a lot of economic uncertainty and suffering because of it. The $2Trillion package is merely a band aid on a wound that will require lots of reconstructive surgery. 

 

Social Security is not a charity. But it IS a SOCIAL program - to benefit society at large - and should be there for those who need it. I do understand how the benefits calculation works, and I am not disputing or recommending a change to that. Like it or not, with our generation taking a huge chunk out of the reserves as we retire, something needs to be done to replace those contributions. I am simply proposing that one way to do that is to remove the cap on how much earnings may be taxed at the current rate. 

 

If you want to compare it to an insurance policy, it's as if a person who has a larger home is able to fully insure that home for less of a premium that a person with a smaller home.  For example:

  • Person A has a 1,500 square foot home in zipcode 12345
  • Person B has a 6,000 square foot home in the same zipcode
  • Both have .5 acres of land

Person A is assessed at $1/sq foot per year to insure their home = $1,500/yr

Person B is assessed at the same rate and receives full coverage for their home, but, because of some arbitrary cap which benefits those who have more, is only charged for 4,500 square feet = $4,500/yr

 

Why? If SS were a truly fair insurance program, the Person B would pay the appropriate cost or $6,000 a year for full coverage.

 

My proposal is merely to help the economy recover once we are through this crisis. No one knows how many jobs will be lost, or how many young people (our children/grandchildren) will not be able to find work.

 

I believe that by giving our generation the benefits that will have been afforded us at 70 - but doing it as early as 62 - it would allow many of us to retire right now. With a few million jobs freed up, we could put yonger people back to work faster and they can begin to refill the SS coffers.

 

If unemployment reaches 20-25% as is projected, then that's a whole lotta folks not paying SS taxes. What I am suggesting behefits us all.

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If you want to compare it to an insurance policy, it's as if a person who has a larger home is able to fully insure that home for less of a premium that a person with a smaller home.  For example:

  • Person A has a 1,500 square foot home in zipcode 12345
  • Person B has a 6,000 square foot home in the same zipcode
  • Both have .5 acres of land

Person A is assessed at $1/sq foot per year to insure their home = $1,500/yr

Person B is assessed at the same rate and receives full coverage for their home, but, because of some arbitrary cap which benefits those who have more, is only charged for 4,500 square feet = $4,500/yr

 

Why? If SS were a truly fair insurance program, the Person B would pay the appropriate cost or $6,000 a year for full coverage.

 

I realize this thread is a year old, but it caught my eye while researching policy discussions in the forum.

 

I don't understand the logic comparing "A" and "B". "A" is fully assessed and covered , whereas "B" supposedly receives "full coverage" but benefits from an arbitrary cap and so pays less?

 

I think it is actually the other way around: "B" is subject to the "arbitrary cap" (the cap on income subject to Social Security payroll tax) and consequently gets less "insurance coverage"...meaning that the proportion of their wage income that is replaced by Social Security old age benefit is less than that of "A", who may be getting 50% or even greater percentage (up to 90%) of their former wage income replaced by Social Security benefits. As I view this, "B" is not getting "full coverage" but gets less coverage.

(disclaimer:  yes, I know that 90% of "peanuts" is still peanuts, speaking in terms of the low wage worker ("A") but that is not the point of this discussion. The point is that "B" does not have the full coverage postulated.)

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@fffred I have read and heard many comments similar to yours advising that the higher compensated folks do not receive the same income replacement as the non-highly compensated folks pursuant to the SS provisions. As you may or may not know, SS benefits are not an income replacement that utilizes a progressive formula such as pension or annuity. In fact, SS benefits are not insurance at all. I suppose one may call SS benefits a social program, but whichever term one uses, SS benefits are welfare benefits. The SS program uses a regressive formula to develop one's monthly SS benefit/amount. Hopefully, I have copied and pasted a link to the SS provisions concerning one's Primary Insurance Amount https://www.ssa.gov/oact/cola/piaformula.html You should note that for 2021, all eligible workers receive 90% of their initial $996 of Average Indexed Monthly Earnings (AIME); then 32% of the next $997 to $6002 of AIME; then 15% of any AIME in excess of $6,002. It should be clear that a person who exceeds $6,002 is receiving 15% more than the person who is earning  less than $6,002. It appears to me that the folks earning less than $6,002 are subsidizing the folks earning greater than $6,002. In other words, those higher income folks have full coverage whereas the less than $6,002 do not.

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@Tonster521 Thank you for confirming that the SS old age benefits are as I described: replacing a greater percentage for lower wage earners than for higher earners. This is described in part at https://www.ssa.gov/oact/progdata/retirebenefit2.html with description of the "bend points".

 

The bend points define the intersection of percent of the AIME ("average indexed monthly earnings" to be paid in benefits, with the percent of the AIME being taken as 90% up to the first bend point, then 32% up to the second bend point, and finally 15% up to the maximum. These bend points and benefit percentages are analogous to the income tax rates at the IRS ...except for income taxes the percent rate for tax increases as income goes up, the opposite of the case for old age benefits.

 

Thus lower earners will get up to 90% of their AIME "income", higher earners will get that plus a portion in the 32% band, thus decreasing the total percent of their AIME that is replaced. And even higher earners will fall into the 15% band with the result that their "net" wage replacement percent drops even further.

 

You may be interested in using the Anypia32.exe software published by the Social Security Administration (see https://www.ssa.gov/oact/anypia/download.html). This program can provide many analyses of SS benefits. It does not cover all cases, however, but is still very helpful.

 

I disagree with your statement that the recipients who fall in the 90% band are subsidizing those in the higher bands. Not true at all. And this can be studied with the Anypia32 program (I did so recently in another thread). At lower incomes the total percentage of AIME received is higher than is received for for higher incomes.

 

As I mentioned in my previous post, 90% of peanuts is still peanuts. But that is not the point of the extract I was commenting on from the original post.

 

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@fffred You may have missed the point of my reply posting which was to provide the PIA formula which clearly indicates the percentages are the same for all SS beneficiaries. In reality, the different percentages occur when the amount of AIME which is a combination of actual earnings and wage indexing factors reach a "bend point" which is indexed each year as well.. I am sure you know that actual wages from the 1960's and 1970's (and some of the 1980's) are increased dramatically to reflect increases in the average wage rate. In my case, wages from the 1960's were increased 7 fold (a little more than 700%) to fit into the AIME formula. Even with that bump, they were not my highest 35 years out of an almost 46 year work history. At any rate, the link that you provided supports the concept that workers with higher AIME receive higher benefits. The link that you used indicates the $4511 AIME received about $2000/month which is about $57/year for 35 years. And the $9979 AIME received about $2900/month which is about $83/year for 35 years. Keep in mind that for 2021, the maximum SS benefit is $3,113/month (single, no spousal, children, or delayed credits). SS replacement ratios will vary depending in the way benefits and earnings are measured. The question that needs to be answered "Why do higher income folks challenge the PIA formula (and bring up replacement ratios) when many of those folks are either at or near maximum SS benefits? I assume you know that the PIA formula and the percentages are established by law (wage indexing began in 1950). It appears to me that higher income folks may be using some combination of their last years of earnings (maybe 5 years or even as minimal as 1 year) to challenge a formula that provides them with 15% more AIME and results in greater SS benefits not less. My guess is that they want more SS benefits which are welfare benefits, not retirement benefits accrued ina pension plan. Because the AIME formula utilizes average wage index rates which for 2021 is $54,099, perhaps the annual average wage index rate should be used to develop one's replacement ratio. It is used to increase earnings for purposes of the AIME. Why not use that amount to develop a replacement ratio for the folks that need such a ratio. I believe that you know the SS program was created to provide a financial foundation for the lower and moderate income workers than to increase the income of the higher income workers. I suspect the regressive AIME percentages reflect an assumption that higher income workers have a greater ability to protect themselves from financial risk. It is estimated that SS benefits keep about 22 million folks out of poverty or just make ends meet. That is about 1/3 of the folks receiving SS benefits.  Lastly, I posted that the folks with AIME of less than $6,002 (90% and 32%) are subsidizing the higher income folks who receive the additional 15% SS benefits. You posted that I stated just the 90%.are subsidizing the higher incomes. Please note that when the actuary develops the uniform tax rate, it accounts for all AIME percentages (90%, 32%, and 15%) to be funded even though many folks will not earn more than $6002 and receive a 15% increase. So,the folks below $6,002 are subsidizing the folks above $6,002. Otherwise, you would have two(2) different FICA tax rates.

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@Tonster521 

 


@Tonster521 wrote:

@fffred I have read and heard many comments similar to yours advising that the higher compensated folks do not receive the same income replacement as the non-highly compensated folks pursuant to the SS provisions

 


@Tonster521 wrote:

note that for 2021, all eligible workers receive 90% of their initial $996 of Average Indexed Monthly Earnings (AIME); then 32% of the next $997 to $6002 of AIME; then 15% of any AIME in excess of $6,002. It should be clear that a person who exceeds $6,002 is receiving 15% more than the person who is earning  less than $6,002. It appears to me that the folks earning less than $6,002 are subsidizing the folks earning greater than $6,002. In other words, those higher income folks have full coverage whereas the less than $6,002 do not.


 

From your overall comments I believe you are making the claim that Social Security beneficiaries from the lower end of the wage range are subsidizing those at the higher end of the wage range, such as the portion I underlined  in your quote above. And you support that claim with this analysis:

 


@Tonster521 wrote:

. The link that you used indicates the $4511 AIME received about $2000/month which is about $57/year for 35 years. And the $9979 AIME received about $2900/month which is about $83/year for 35 years.

 All you are doing is taking the arithmetic average of the SS retirement benefit over 35 years. This "sounds good". Maybe it makes a good sound bite. But the number obtained provides no useful information, it is essentially meaningless. It cannot be compared in any meaningful way to any other value calculated by the same method. It may provide some "rule of thumb" comfort but I believe that it has no meaning.

 

The AIME is found by factoring the 35 years of wages for the applicable increases in cost of living. Thus we can say that the AIME is a geometric "average" of all years' wages. But you are then dividing the benefit based on the AIME by the constant 35 years, obtaining an arithmetic average. The result has no meaning.

 

Several logical flaws exist in the assumption that this analysis ("divide by 35") provides a meaningful result.

 

One occurs to me just now. The "average" AIME for someone who retired 30 years ago is likely much less than that for someone who retired 5 years ago. In this case the older one's benefit is smaller and the "divide by 35" ratio is also smaller. By your logic the older person has been subsidizing the younger person simply because their "ratio" is less. I believe this example is sufficiently clear that the logic is skewed so that no further explanation is necessary in this case.

 

Another argument against the utility of your "ratio": build yourself a table of calculated values using an electronic spreadsheet (Excel, etc) or just by using pencil and paper. Make a list of different AIMEs all within the first band (that band of "90%" up to the first bend point). List the corresponding SS old age benefit (simply 90% of the AIME) in the next column. Third column, divide the benefit by 35. You will see that the smaller AIME values have smaller ratios than the higher AIME values. This is simple arithmetic. But the result has no relevance to any discussion. To conclude this counter-argument, surely we cannot say that the entire Social Security system is carried on the backs of those with the very lowest AIME simply because they have the lowest "ratio"; they simply cannot have produced enough cash to support everyone else.

 

Continuing the table I described above for AIMEs that lie within the second band (up to the second bend point) and also those that extend beyond the second bend point, it is seen that the "ratio" indeed increases for every such increasing AIME, no argument about it. And that is simply because that benefit is based on the recipient having earned higher wages and put more money into the SS system. It can also be seen that eventually, after each bend point that the relative increase in the "ratio" actually decreases...because of the effect of the new factors of 0.35 and 0.15.

 

I created these tables in Excel and loaded them into Google Sheets. I may share the Google Sheet version for public access. It was interesting to see what happens if the bend points are severely restricted or even eliminated. Those pesky "ratios" still increased for "the rich guys".

 

(click here to see the "Google Sheets" spreadsheet version https://docs.google.com/spreadsheets/d/1lNzpnQ8vqWqMom2bBCeR3rKjmkRpCxzcPkA_Z5hQDQ0/edit?usp=sharing)

 

I have no comment on the remainder of your comments. I am focused on the claim that SS benefits are geared for the benefit of those at the higher end of the wage scale. The conclusion is that the "ratio" found by dividing the benefit by 35 years is meaningless. A more meaningful measure is the ratio of the benefit amount to the AIME and this shows that the lower AIME have a higher proportion of their wage paid as a benefit than for higher AIME. I presented a discussion and numerical example in this thread https://community.aarp.org/t5/Social-Security/Social-Security-Misconceptions/td-p/2418877

 

 

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@fffred Once again, the data that you provided support that the PIA formula is the same for all SS beneficiaries and that workers with higher AIME receive greater SS benefits. By the way, the spreadsheets that you provided appear to use 35% instead of 32% for the second tranche. The SS benefit is slightly less. Anyway, I understand the calculation; however, I do not understand the comparison to the AIME which are a recalculation (wage indexing) of a worker's 35 years of actual (real) earnings. As you know, actual earnings are significantly less (perhaps 50% or more )than the indexed recalculations. For example, the $4511 AIME used $1,894,877 and  the actual (real) earnings were only about $1,229,000 which is about 54% less. That looks like the proverbial apples and oranges comparison. Moreover, why are you even calculating an income replacement percentage when the SS Program was not designed to replace a percentage of all workers income. It was designed to provide a foundation for low and moderate income workers as a means to receive an income at or above the poverty level. It was not designed as a single source of retirement income. From time to time, the SSA has studied whether or not the PIA formula has provided enough income to succeed at the above goal and it has. However, talking to those unfortunate folks at or just above poverty renders a different answer. And, I tend to agree with the majority of the unfortunate. As it stands currently, all workers receive the 90% tranche/threshold regardless of their amount of AIME. So, nobody, especially the higher AIME, are being shorted or underpaid. In fact, the SSA reports the average SS benefit is approx. $1500 - $1,600. Of course, there are folks receiving less and more than the average. At any rate, if you read the SS link (Primary Insurance Amount) that I provided in my July 21, 2021 posting and read the related highlighted links such as Average Index Monthly Earnings, National Average Wage Index, etc.,it should be clear that the SSA uses various averages on an annual basis to develop a  monthly SS benefit that grows, build ups, or accrues during a person's working lifetime. regardless of how long someone works, the divisor for the AIME formula is always 420 months or 35 years. In my example,I could have  converted the SS benefit to a monthly average accrual ($2,000 divided by 420 months), but I elected to use an annual accrual ($2,000 divided by 35 years) because it has been my experience that most folks are familiar with annual amounts or accruals especially if they receive annual benefit statements (which may include SS estimates) from their employers. Next, there are various methods for developing a monthly benefit. Some common benefit formulas are (1) dollars times service (many Union pensions use this method); (2) Final Average Pay (i.e., a percentage times a 5 year average); and (3) Career Average Pay (i.e., a percent, such as 1% of career pay ,divided by 12). The Career Average Pay may include a recalculation which is the approach that SSA uses by utilizing indexing provisions (highest 35 years) and the NAWI. It should be noted that folks with less than 35 years of earnings receive a zero for each missing year. The PIA formula is the sum if three separate percentages (fixed by law) of the AIME. It is not a single percentage formula that you are suggesting as an income replacement. All workers have the same PIA formula.  The dollar amounts (bend points) for each separate percentage calculation change annually with changes in the NAWI. There are 35 annual calculations that use the AWI to develop the amount that is divided by 420 months to provide the AIME. These 35 index calculations are designed to make all earnings current. SS advises that indexing earnings reflects the change in general wage levels that occurred during the worker's years of employment. The differences will vary from person to person due to the AIME not the PIA formula. The 35 year may be meaningless to you, but I suspect many appreciate those indexed  accruals and increased SS benefits.FYI, the link to AWI provides SSAraw data regarding aggregate wages for 2019 at about $8.8 Billion for about 170 Million workers for an average wage of about $52,000. This amount is increased/indexed to $54,099 for the AWI for folks eligible in 2021 (age 62). Based on this macro data, it it clear that the greater majority of workers earn less than the second tranche/threshold of $6,002 (which is about $72,000/year). Many of these folks will not reach the third tranche/threshold in their working lifetime, yet they pay the same FICA tax rate as the folks in the third tranche/threshold (greater than $6,002). As you know, those third tranche/threshold folks enjoy an increase of 15% of their AIME. Those folks with an AIME less than $6,002 are subsidizing the folks above $6,002. Otherwise you would have two separate tax rates.I believe confusion exists regarding the use of income replacement percentages. Despite widespread use by individuals and financial advisors, there is no common method for measuring income replacement percentages. Moreover, it is inept to isolate SS benefits when measuring income replacement percentages inasmuch as the SS Program was not designed to be the sole source of old age/retirement income. As a side comment, you do not need to retire to receive SS Benefits. Another issue is that there is no agreement on the proper way to measure pre-retirement earnings. Do you measure your last year of earnings? Five years? What if you elected to semi retire with a part time job at age 55?  I want to point out that the sample you used in your July 18, 2021 does not support any income replacement concept. You are comparing a $1,680 AIME or 35 year earnings of $705,600 versus a $5,973 AIME or 35 year earning of $2,508,660. Really? You indicated the $1,680 AIME will receive a SS Benefit of $1,051. That person just meets the poverty level. If married, they would be below poverty. You are comparing that person to someone who earned over $2,000,000 (AIME $5,973) and receives a SS Benefit of $2,294 which is 100% greater. This is not only a disgusting example, but a sad day for the folks trying to make ends meet at lower and moderate ends of the wage scale. Your last paragraph of your August 3, 2021 posting indicates that you are focused on the claim that SS Benefits are geared for the benefit of those at the higher end of the wage scale. Is that your claim? It is sure not my claim. My concern is to ensure that SS Benefits are adequate to keep the lower and moderate income folks above the poverty level. It appears to me that you are focused on increasing SS Benefits for the higher end of the wage scale when you create and compare income replacement percentages for isolated SS Benefits. Good Luck. 

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@Tonster521 

 

Thank you for pointing out my typographical error of 356% [haha, there I go again. 35%] vs 32%. I have corrected that.

 

I continue to disagree with your contention which is essentially that "the rich guys" are making out better than "the little guys". That's what your discussion comes down to and what you have explicitly stated, "It appears to me that the folks earning less than $6,002 are subsidizing the folks earning greater than $6,002."

 

And this is an interesting point because I myself am a "bleeding heart liberal", in favor of the little guys, unions, and all that. But I find analyses based on what I consider to be illogical or unfounded assumptions to be unhelpful. And that is my view of your rule of "dividing the Social Security benefit by 35 years" to get some measure to support your thesis. I don't believe the calculation has any worth for comparison purposes.

 

Now my own assumption is that there is likely no better proxy for one's "average wage" than the AIME. We have to consider the "time value of money" (the old TVM) and the AIME accounts for this. And comparing the SS benefit to the average wage seems, to me, to be the best measure of how anyone benefits from their SS benefit.

 

Your method of taking the arithmetic average of the SS benefit over 35 years is artificial. And I believe I can point out the flaw with an example from my actual experience. I believe the situation I describe below is a parallel fallacy to the "divide by 35" rule.

 

Around 1985 a big Bank in St. Louis was always running a full page ad on the back of the paper. They advertised that you put so much cash into this CD and after so many years you would have so much money. Then they reported the percentage that you'd earn on that account. The thing is the percentage rates shown for long periods of time, say 10 years and up to 20 years were just unbelievably high. They were high enough such that they nearly matched the long term rate of return of the stock market. If so, then why bother with risky stocks, just put the money in these guaranteed accounts! But the posted rates were not credible.

 

I figured out what they were doing. They described the rate of return as something to the effect of "Average Annual Rate of Return". Not quite the APR, etc, terms defined by consumer laws.

 

They took the total amount paid out in interest over the full stated term of 20 years, etc, and divided that by the number of years to get the "average annual interest", an arithmetic calculation of the dollar amount. This divided by the principal amount produced the "Average Annual Rate of Return". For longer periods of time the "rate" was more than double the APR and would have been attractive versus stocks.

 

But the measurement of this "rate of return" was a complete fallacy. In fact, it was because of "fallacies" like this that the truth in lending laws were written. Because this presentation of an rate of return was intended (I have no doubt) to hornswoggle credulous consumers. I mean, I worked in an office full of sharp engineers and businesspeople and no one caught this until I saw what they were doing, on purpose, to confuse their customer and showed it around.

 

Dividing the Social Security benefit by 35 years to get an "average per year of work" is the same sort of calculation as that bank's advertising: it's a calculation without meaning.

 

Now you go on with some further discussion about "why are you even calculating an income replacement percentage when...". This is all well and good, but how else can any objective review of your postulate be accomplished? You claim that those who end up in the 32% and even 15% are getting more, proportionately, than they put into the system relative to others who may be in the 90% tranche.

 

Now you have written a lot. And I haven't read all of it in depth, although I will later do so. But I skimmed sufficiently to see that you have provided no further backing for your contention that "It appears to me that the folks earning less than $6,002 are subsidizing the folks earning greater than $6,002. In other words, those higher income folks have full coverage whereas the less than $6,002 do not."

 

I have provided mathematical illustration that this is surely not the case. I would like to see your own mathematical support for your contention. I really do not see anything like a description to support your stance. Again, I really have no views to share on all the other issues you throw in, I am trying to focus on the very specific issue that you claimed, that those at higher income levels are getting treated better than those at the lower income levels.

 

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A couple of observations:

 

Social security benefits are already "means tested".  The "break points" in determining PIA penalize those with higher incomes.  Moreover, they will pay more tax on their benefit by virtue of having financially prepared for retirement by saving in programs like 401Ks. 403Bs, etc.  

 

The system is in dire straits.....  lowering the FRA from 66 (note) to 62 would make this worse.  Social security was instituted in 1934 when the average lifespan was 60 years.  Benefits began at 65.  By those standards, the FRA should be adjusted to 88 (2021 average lifespan plus 5 years)

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@sktn77a Hopefully, I am providing a link to statistics from the SSA regarding life expectancy https://www.ssa.gov/history/lifeexpect.html Essentially, the article provides stats based on empirical data regarding life expectancy of 65 year olds (male and female) from 1940 to 1990. You can go to the SSA website for current stats (perhaps 2018) and the numbers will continue to increase,  but not by much. So, life expectancy from age 65 has been on average about 13 or more years since 1940. It is not accurate to assume average life expectancy was less than age 65 in 1935. Hope this helps.

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