Personal Finance

In Case You Missed It, Democrats Also Have a Bill to Completely Reform Social Security

A person holding their Social Security card.

More than 41.2 million retired workers receive Social Security checks each month, and for most that check represents at least half of their monthly income. Social Security is, and is expected to remain, a means by which a large percentage of seniors avoid living in poverty.

However, the program that millions of seniors have come to rely on is in trouble.

A person holding their Social Security card.

Image source: Getty Images.

According to the Social Security Board of Trustees 2016 report, the program is expected to burn through its more than $2.8 trillion in spare cash by the year 2034, at which time benefit cuts of up to 21% may be needed across the board to extend the life of the Social Security program through 2090. For those aforementioned retired workers who rely on the program and the soon-to-be-reliant baby boomers, it's a chilling forecast.

President Trump, for his part, pledged to leave Social Security as is during his campaign, promising only to honor the commitment America has with retired workers to pay back in benefits what they put into the system.

Trump, while not denying that Social Security has issues, is aiming to tackle Social Security's problems indirectly through individual and corporate income tax reforms, domestic energy and infrastructure projects, and renegotiated trade deals. Together, these reforms are expected to boost U.S. GDP, providing more income to workers and subsequently more payroll tax revenue for Social Security. It's a strategy that's far from a sure thing, however, since it requires superior U.S. GDP growth for an extended period of time.

Republicans lay out their Social Security reforms

Despite Trump's pledge to not alter Social Security, Rep. Sam Johnson (R-Tx.) introduced the Social Security Reform Act of 2016 in December before Trump took office. Johnson, the chairman of the Ways and Means Social Security subcommittee, offered a plan that would completely reshape the Social Security program. While you can read about Johnson's plan in greater detail , here's a quick summary of its key points:

Social Security card embedded between cash and fanned out.

Image source: Getty Images.

  • The full retirement age would increase from 67 years, which will be hit in the year 2022 for those born in 1960 or later, to age 69 by the year 2030.
  • Cost-of-living adjustments (COLA), which are currently tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), would be switched to the Chained CPI to more accurately reflect consumer purchasing habits.
  • The taxation of Social Security benefits would begin to be phased out in 2045, and will have completely ended by the year 2054.
  • The minimum benefit available to those who worked throughout their lifetimes but failed to earn a lot would be raised.
  • The retirement earnings test that allows the Social Security Administration to withhold some or all of your benefits based on your income prior to reaching your full retirement age would disappear by 2023.
  • Spouses and children of higher-earning retired and disabled individuals would have their benefit amounts capped.

As you may have rightly guessed, Johnson's plan has been met with both praise and criticism. Some pundits, including members of the Republican Party, would suggest that raising the full retirement age accurately reflects lengthening life expectancies, and eliminating the taxation of benefits would allow individuals and families to keep more of their income in retirement.

Conversely, Johnson's plan was criticized by other pundits, including Democrats, for reducing COLAs via the use of the Chained CPI, which grows at a slower rate than the CPI-W, and for raising the retirement age and essentially cutting benefits for all future retirees, who'd either need to wait longer to get their full benefits or accept an even steeper reduction in monthly payouts.

Male senior citizen in deep though while viewing his laptop.

Image source: Getty Images.

Surprise, Democrats have a Social Security reform plan of their own

But guess what? Republicans aren't the only ones who've been busy behind the scenes crafting Social Security reforms. Just two weeks ago, Rep. Brian Higgins (D-NY) once again threw his support as co-sponsor behind the Social Security 2100 Act , which was previously introduced by Rep. John Larson (D-Ct.) in 2015.

Much like Johnson's Social Security reform bill, Larson's tackles a variety of topics. It would:

  • Revise the COLA calculation by removing the CPI-W as the leading indicator and replace it with the Consumer Price Index for the Elderly (CPI-E). The CPI-E only factors in the spending habits of households with persons aged 62 and up, meaning it would be more representative of the spending habits of a majority of Social Security recipients.
  • Reinstitute the payroll tax of 12.4% (which is often split down the middle between an employee and employer, 6.2% each) on wage income above $400,000. Right now, all wage income between $0.01 and $127,200 is subject to payroll taxes, while wage income above $127,200 is free and clear of the payroll tax. Under Larson's proposal, wage income between $127,200 and $400,000 would be exempt, but any amount above and beyond $400,000 would once again be subject to FICA taxes .
  • Increase the minimum monthly benefit paid to workers who didn't earn very much over their lifetimes, which is a point that Larson's bill shares with Johnson's proposal.
  • Amend the taxation of Social Security benefits to reflect changing prices over the past 34 years. Signed amendments by Congress that went into effect in 1983 allow for the taxation of some of an individual's Social Security benefits if they earn more than $25,000 annually, or $32,000 as a couple. These thresholds haven't been adjusted in 34 years. Larson suggests increasing the individual threshold to $50,000, and the married couple threshold to $100,000.
Dice laying next to a piece of paper that reads "Will Your Social Security Be Enough?"

Image source: Getty Images.

Does this plan make more sense?

Of course, the big question you're probably wondering is if the Democrats' Social Security proposal makes more sense than the Republicans. The truth is that, like the Republican plan, it offers a bit of a mixed bag, with some very intriguing points and some serious letdowns.

For example, tying COLA to the CPI-E would allow seniors to receive a larger COLA each year than they're currently getting with the CPI-W. A comparison by the Bureau of Labor Statistics in Dec. 2011 found that seniors spend twice as much as a percentage of their total monthly expenditures on medical care, as gauged by the CPI-E, than people used in the CPI-W calculation. The CPI-W also understated housing costs for seniors as a percentage of total expenditures. Using the CPI-E, according to The Senior Citizens League, would have resulted in an average increased payout of 8.9% per year over the past 25 years, or nearly $30,000 extra in the pockets of the average senior citizen.

Amending the taxation of benefits to arbitrarily reflect inflation over the past 34 years also seems like a smart move that'll allow beneficiaries to keep more of what they're due.

A senior man in a suit appearing upset.

Image source: Getty Images.

On the other hand, even though reinstituting FICA taxes on well-to-do individuals earning more than $400,000 will add revenue to the program, it doesn't completely cover the budgetary shortfall in Social Security over the next 75 years. Furthermore, it would require the wealthy to pay more into the program without any added compensation when they retire. Admittedly, the wealthy probably aren't going to be reliant on Social Security during retirement, but it's a bit unfair considering that benefit formulas are based, in part, on a person's average monthly earnings over their 35 highest-earning years.

What's more, increasing the minimum monthly benefit amount, while also switching to the CPI-E and amending Social Security's taxation of benefits, is a means to increasing the program's total payouts while minimizing the impact of increased FICA taxes on the wealthy. In plainer English, it'll boost benefits for lower-income folks and retirees, but it could deplete the program's spare cash even faster, or minimize the impact of taxing the wealthy by amending the maximum taxable earnings scale.

Personally, I still feel that a winning formula to fix Social Security will involve a compromise from both sides of the aisle. Payroll tax increases on workers and benefit cuts on future retirees will likely be needed to shore up Social Security for generations to come.

The $16,122 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies .

The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics


Latest Personal Finance Videos

    #TradeTalks: The Changing E-Commerce Landscape

    e-Commerce Consultant James Thomson joins Jill Malandrino on Nasdaq #TradeTalks to discuss the changing e-commerce landscape, what consumers should prepare for as we head into shopping season and why you shouldn’t do last minute shipping.

    2 days ago

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More