Opinion: A new proposal will improve the economy of social security and a modest improvement in benefits
Opinion: A new proposal will improve the economy of social security and a modest improvement in benefits

Opinion: A new proposal will improve the economy of social security and a modest improvement in benefits

Rep. Al Lawson (D-FL) recently proposed a piece of social security legislation, which has been scored of SSA’s Office of the Chief Actuary. The Lawson proposal is the second major law on social security in a month. after Rep. John Larsons (D-CT) Social Security 2100: A Sacred Trust.

As a reminder, social security actuaries project a program deficit over the next 75 years of 3.54% of taxable wages. This deficit reflects the combination of rising costs and constant income levels (see Chart 1). The rising costs are the result of a slowly growing workforce and retirement of baby boomers, increasing the ratio of retirees to workers. The social security deficit can be eliminated either by raising the income rate and / or lowering the cost rate.

Read: Proposals for social security will increase revenues and temporarily improve benefits

Both the Lawson and Larson bills maintain the current benefits – that is, they do not reduce the cost rate. Instead, they raise the income rate by raising the ceiling for maximum taxable income. The area where the two bills differ most is benefits. While the Larson bill proposes a dozen improvements over a five-year period, the Lawson bill offers four improvements on a permanent basis.

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Specifically, the Lawson legislation proposes that:

  1. Use the CPI-E consumer price index, which has historically risen faster than the CPI-W price index currently used for social security, to adjust inflation benefits.

  2. Extend study benefits up to 23 years if full-time students.

  3. Increase the special minimum benefit for very low-income workers and index it with the growth in the average wage.

  4. Establish an alternative benefit for surviving spouses corresponding to 75% of the couple’s benefit (with an upper limit).

To pay for these benefit improvements and, more importantly, to reduce the 75-year deficit, Lawson legislation would apply the payroll tax to earnings above $ 250,000 and to all income when the taxable maximum reaches $ 250,000. The legislation will apply a benefit factor of 2% to average income above the current legal maximum.

Read: This Hidden Wrinkle in Social Security Can Help You Decide When to Apply for Benefits

The introduction of these benefit and income provisions will reduce the long-term deficit of social security approximately by half, from 3.54% of the taxable wage amount to 1.88% (see Figure 2).

Both bills have some favorable aspects: they maintain current benefits, and they increase additional revenue, although at least the Larson bill appears limited in the revenue-raising efforts of President Biden’s promise not to raise taxes on households earning less than $ 400,000.

In terms of benefit enhancements, both “spend” a lot of future revenue on switching from CPI-W to CPI-E to index benefits. Personally, I would not bother. The other benefit changes in the Lawson Bill are relatively small and positive. Most importantly, they are permanent and avoid the chaos that is likely to be created by the temporary improvements in the Larson Bill.

In the end, however, any solution is likely to involve a modest increase in the payroll tax ratea change that would raise the tax on them by less than $ 400,000.

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