Here’s a novel idea: How about more Social Security, not less?
The notion came to me as I read the flood of articles on the changes in Social Security claiming rules in the long awaited budget bill. The bill enables our government to borrow yet more billions. At the same time, it eliminates the ability of some to use the many rules of Social Security to squeeze out a few more bucks in benefits.
Closing those Social Security claiming strategies ends a minor growth industry. Invitations to Social Security advice seminars are on the way out. Many commented, but most missed the real story here. It has two parts.
- First, for the vast majority of Americans, the nuances of Social Security claiming might as well not exist. Most people need their Social Security benefits ASAP. A massive 91 percent of retirees claim their benefits on, or before, full retirement age.
- Second, the only reason Social Security claiming got to be a big deal is that people with savings can’t earn any interest. This is due to the Federal Reserve zero interest rate policy, ZIRP.
What we have here is a two-way “gotcha” from Washington. Whether you saved or not, retiring is a frightening prospect.
So maybe we should think differently. Let’s ask, what can we do to expand Social Security benefits? How about more benefits all around? (Sorry, not in time for Christmas.) What would it cost? How can we do it?
To answer that question I turned to “Social Security Works! Why Social Security Isn’t Going Broke and How Expanding It Will Help Us All.” (The New Press, 2015). Nancy J. Altman and Eric R. Kingson wrote the book. Ms. Altman is the founder of Social Security Works, a Washington-based non-profit. As you might guess, it advocates for expanded Social Security. If her name rings a bell, I took her notion of Social Security finance to task earlier this year when the new Trustees Report came out.
The report tells us, on page 4, that Social Security faces an actuarial deficit, measuring 2.68 percent of taxable payroll over the next 75 years. The shortage will run the Social Security trust fund to zero by 2034. After that it would be necessary to cut benefits by 21 percent. That would match payroll tax revenue.
In other words, before we can expand Social Security benefits, we have to fill the hole the program is already in. But if we think beyond the payroll tax box, the hole isn’t overwhelming. We spend about 5 percent of gross national product on the program today. We will see the cost increase to 6.2 percent of GDP over the next 75 years. The major industrial nations already spend about 10 percent of GDP on their programs for the elderly and disabled. By comparison, filling our gap hardly qualifies as radical.
Altman and Kingson provide a menu of choices for closing the gap as well as increasing benefits. (The utterly ignored 2010 report from the Simpson-Bowles Commission also provided a list. Most were to whittle down future benefits, not expand them.)
Here are the three big revenue sources tagged by Altman/Kingson:
- Raise the taxable wage base top over time. It's now $118,000. But give credit for the contributions. That’s worth 1.95 percent of taxable payroll.
- Enact a 10 percent marginal income tax increase on income over $1 million. This would increase revenue by 1.5 percent of taxable payroll.
- Increase the Social Security contribution rate by 1/20th of a percent per year. Stop when the rate reaches 7.2 percent on both employees and employers. That increase would cover 1.41 percent of the cost gap.
These three changes, combined, total 4.86 percent. But the revenue gap in the current Trustees report is 2.68 percent of taxable payroll. So there is an “extra” 2.18 percent. This leaves plenty of room to cut and tweak. It means promised benefits for current and future retirees can be secured.
Here is Altman/Kingson's most generous proposal: They would increase benefits by 10 percent, up to $150 a month. This would apply to all current and future beneficiaries. It would cost 1.20 percent of taxable payroll.
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.