Proposed Expansion of US Social Security

The US Senate Committee on Health Education Labor and Pensions (HEL P) has published proposals to address the challenge of providing adequate levels of pensions and social security. These proposals have been developed based on some basic principles that include universality and certainty. Among the objectives of these proposals is the provision of predictable retirement income for all individuals. One of these proposals is directed at expanding social security benefits; another is designed to encourage supplemental savings from automatic payroll deductions.

According to HEL P, Social Security is an efficient means of delivering retirement security to millions of Americans and one of the most effective ways to address the retirement crisis is to improve Social Security benefits in a fiscally-responsible way. A comprehensive plan to accomplish this is contained in The Rebuild America Act introduced in the Senate in March 2012. This plan has three principal features: (i) increasing the amount of scheduled benefits; (ii) ensuring that cost-of-living adjustments (COLA) are appropriately designed to reflect typical costs for seniors including health care; (iii) improving the long-term solvency of the system by increasing the covered earnings subject to the Federal Insurance Contribution Act (FICA ) tax above the existing limit.

Increasing the amount of scheduled benefits would be accomplished by changing the formula for determining the Primary Insurance Amount (PIA ) that is used for calculating benefit amounts. This formula currently comprises three segments with a progressive scale of benefit percentages applied to various ranges of earnings within a covered individual’s Average Indexed Monthly Earnings (AIME ): 90% up to $767; 32% between $767 and $4624; and 15% between $4624 and $8532. The proposed change would apply the 90% rate across a 15% increase 2012in the range for the first segment of AIME and introduce a fourth segment beyond the third segment with a benefit percentage set at 5%.

The proposed basis for determining cost-of-living adjustments would change the way COLA is calculated so that it reflects the year-to-year changes in seniors’ actual cost-of-living experience. Currently the annual adjustment is based on the Consumer Price Index for Urban Wage Earners; this index is based on the cost of a basket of goods that does not adequately track the purchasing pattern of seniors, particularly the cost of medical care. Under the proposed change for COLA, the existing index would be replaced by a Consumer Price Index for the Elderly; this index is specifically designed to track actual costs for seniors.

Although the Social Security system is projected to have very high cash flow adequacy rates over 25, 50 and 75 years in terms of meeting scheduled benefits from projected payroll and income taxes, interest, and trust fund maturity proceeds, the adequacy ratios decline over the longer projection periods and the system is expected to require corrective actions to meet long-term projected deficits. In order to improve both future benefits and the projected solvency of the system, the proposed change would phase out the limit on annual covered earnings subject to FICA that is currently set at $110,100. This change would be phased in over a ten-year period and, according to HELP, will significantly extend the life of the Social Security Trust Fund beyond the point where cash flow adequacy is projected to fall below 100%.

It is encouraging to see the proposals introduced by this Act to strengthen Social Security by improving scheduled benefits, introducing better-designed COLA’s, and enhancing tax revenues to support the long-term financing and solvency of the system. It remains to be seen how these proposals will fare in the months leading up to the November presidential election and beyond. In previous editions of Commentary, we have appealed for a National Retirement Income Policy (March 2011) and asked Where is the Public Debate on National Retirement Income Policy? (February 2012). We had listed several major issues that should be considered in this debate including: adequacy and shortfalls in existing arrangements; financial resources required to provide adequate old-age income security; affordability of adequate retirement income relative to other national priorities; roles and responsibilities of government, employers, and individuals; assessment of social transfers policy; viability of employer-financed retirement plans; tax treatment of various retirement income sources; rationalization of tax policy; regulatory framework for pension arrangements; strengthening the funding of defined benefit plans; reducing the potential exposure of the PBGC for under-funded pension obligations; expansion of the Social Security system to offset the decline in employer-sponsored defined benefit pension plans; projected solvency and sustainability of Social Security with due consideration of the potential need for future revenue increases; and the government’s responsibility for the ongoing timely payment of principal and interest on its holdings of special-issue Treasury bonds that are held in the Social Security Trust Fund. The HELP proposals are a step in the right direction in addressing these issues.