Congressman Larson’s Social Security Proposals
Democratic Congressman John Larson of Connecticut has introduced proposed legislation, Social Security 2100 Act, to strengthen Social Security and achieve 100% solvency over the next 75 years. His proposal comprises seven key provisions to generate enhanced revenues, provide benefit improvements, and eliminate the current 75-year projected actuarial deficit. These seven provisions are described in a July 31 memorandum from the Social Security Office of the Chief Actuary (OACT) as follows: (i) Invest up to 25 percent of the trust fund reserves in equities, fully effective in 2025. Equities investments are phased in beginning in 2016; (ii) Increase the combined OASDI payroll tax rate to 14.4 percent, fully effective in 2037. The combined rate is increased by 0.1 percentage point each year starting in 2018. In addition, the payroll tax rate is reallocated between the Disability Insurance (DI) Program and the Old-Age and Survivors Insurance (OASI) Program with the intent to roughly equalize the actuarial status of the two trust funds; (iii) Apply the combined payroll tax rate on earnings above $400,000, fully effective in 2015. Tax all earnings once the current-law taxable maximum exceeds $400,000. Credit the additional earnings that are taxed for benefit purposes by: (a) calculating a second average indexed monthly earnings (AIME+) reflecting only additional earnings taxed above the current taxable maximum, (b) applying a 2-percent factor on this newly computed AIME+ to develop a second component of the Primary Insurance Amount (PIA), and (c) adding this second component to the current-law PIA; (iv) Increase the threshold for taxation of benefits to $50,000 for single filers and $100.000 for joint filers, fully effective in 2015. These revised thresholds would
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Democratic be fixed and not indexed to inflation or wages; (v) Use the Consumer Price Index for the Elderly (CPI-E) to calculate the cost-of-living adjustment (COLA), effective for December 2015. It is assumed this change would increase the COLA by an average of 0.2 percentage point per year; (vi) Increase the first PIA formula factor from 90 percent to 93 percent for all eligible beneficiaries as of January 2015, and for those newly eligible for benefits after January 2015; (vii) Increase the special minimum PIA, beginning for workers who became newly-eligible for old-age or disability benefits or die beginning in 2015. For beneficiaries newly eligible in 2015, the minimum initial PIA for workers with 30 or more years of coverage is one twelfth of 125 percent of the annual poverty guideline for a single individual as published by the Department of Health and Human Services for 2014.
According to the OACT, the financial effect of all of the seven proposals in combination would be to improve the long-term projected 75-year actuarial balance by the equivalent of 2.77 percent of payroll as compared to actuarial deficits under current law of 2.72 percent of payroll as reported in the 2013 annual trustees report (2.88 percent as subsequently reported in the 2014 annual trustees report). When each of the seven proposed provisions is valued in isolation, without regard to the possible interaction of the provisions, the first three provisions generate revenue enhancements equivalent to 0.38, 1.45, and 1.83 percent of payroll respectively. The remaining four provisions generate costs equivalent to 0.12, 0.37, 0.24, and 0.21 percent of payroll respectively. Because the proposed legislation includes investing a portion of the trust fund reserves in equities, a significant element involved in the actuarial projections is the expected rate of return on equities in relation to the assumed rates for long-term Treasury securities; the report of the Chief Actuary discloses an assumed “equity premium” of 3.5 percent in excess of the 2.9 percent yield for Treasury securities, representing an assumed future real rate of return for equities of 6.4 percent over the long term. The proposals address the need for enhanced Social Security revenues by a combination of increased payroll tax rates and moving towards the inclusion of all earnings for tax purposes in two steps; (i) applying the payroll tax to earnings above $400,000 starting in 2015 and then narrowing the gap between the current maximum taxable earnings limit of $117,000 and the $400,000 threshold with annual increments as provided under the current law. The proposals also address the logical choice of the COLA adjustment basis by utilizing the CPI-E that is constructed in such a way as to reflect the actual expenditure patterns of elderly persons as opposed to the current practice of utilizing an index that reflects the expenditure patterns of wage earners. Congressman Lawson and his legislative aides have produced a well-thought-out and affordable piece of proposed legislation that addresses all of the major issues in the debate about reforming Social Security to make it fairer and less regressive, with high-income earners paying a fair share of the cost of the social compact that Social security represents.