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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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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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