This Move By Lawmakers Could Reduce Select Social Security Benefits By 19%

By Markets Fool.com


Source: Flickr user Ron Cogswell

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The 114th Congress has been in session for less than a week and we already have a major piece of legislation introduced in the House of Representative that could have a lasting effect on millions of Americans.

Lawmakers take aim at Social Security
On Tuesday the Republican-led House of Representatives approved a rule that would deny a payroll tax reallocation from the Old-Age and Survivors Insurance Trust Fund (OASI), which divvies out benefits to retired workers and survivors of deceased workers, to the Social Security Disability Insurance Trust Fund (DI). The House would, however, approve a reallocation as long as it is accompanied by benefit cuts or tax increases that improve the solvency of the OASI and DI.

Since 1968, according to Kathy Ruffing at the Center of Budget and Policy Priorities, there have been 11 reallocations of payroll taxes to help whichever fund was running short on reserves. However, in this instance denying to redirect payroll taxes from the OASI to the DI will likely result in the Disability Insurance Trust Fund running out of reserve cash by next year. If this were to occur without any changes being made to the current payroll tax allocations those who receive Social Security disability benefits will see their benefits automatically fall by 19%. With an average family benefit for disabled workers of $1,943 as of December 2013, this means a nearly $370 monthly benefit cut if nothing is done.


Source: Social Security Administration

Could this move stick?
You might wonder, "Why this sudden crisis?" A number of factors are at play here.

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To start with, the rapidly growing retirement of baby boomers means more and more people are claiming retiree benefits and not enough young workers are taking their place, which is increasing the outflow of funds from the OASI. People are also living longer than ever before, meaning the OASI will be paying Americans for an even longer period of time. With this in mind a majority of lawmakers in the House of Representative presumably believe it'd be wrong to allocate additional funds away from this significantly larger group of beneficiaries.

However, the likelihood of this move sticking may not be as high as you'd think, even with a Republican-led Congress. For example, Ruffing notes that the math makes sense for funds to be reallocated to the DI in order to help the 10.97 million eligible beneficiaries that received a disability benefit as of June 2014. Because the OASI is much larger than the DI -- the OASI is responsible for 47.6 million of the 58.6 million beneficiaries, and nearly $58 billion of the $69.6 billion paid out in monthly benefits as of June 2014 -- a simple reallocation could extend the life of both programs to 2033.

Source: Flickr user bark

Ruffing notes that reallocating payroll taxes to the DI could extend the program an additional 17 years to 2033, while the OASI will see its reserves depleted just a year sooner (from 2034 to 2033) than if no reallocation were ruled upon.

Additionally, the 11 million Americans on disability aren't going to just accept a 19% cut in their benefits lightly. Chances are we'd see a backlash from consumers against lawmakers for not making any long-term progress in fixing Social Security.

Three popular fixes
While it remains to be seen what lawmakers will eventually propose to provide a long-term solution to fix the Social Security system, the American public has spoken in recent survey from The Washington Post and offered its two cents on how to fix the system.

Coming in dead last was the idea of doing nothing and simply raising taxes or cutting benefits for the next generation once the reserve funds run out. The American public realizes that changes need to be made sooner rather than later, and that doing nothing isn't the correct course of action. It's more evidence that the House of Representative's early actions are unlikely to stick.

Instead, respondents offered their three most popular ideas to fix Social Security:

  • Raise the earnings cap
  • Raise the full retirement age
  • Change the cost-of-living adjustment

The interesting aspect of these selections is that none of them bridges the current money shortfall by more than 30%, so even more would need to be done in order to keep both trust funds at their current full retirement benefit level.

Raising the earnings cap was by far the most popular option -- and it isn't that surprising why. As it stood in 2014, Social Security taxes are collected on every dollar up to $117,000. Any income earned beyond that amount if untouchable by Social Security's payroll tax. By boosting the earnings cap to say $250,000 the trust funds would net more revenue from upper-income earners and it would only wind up affecting about 6% of the population. Since it likely wouldn't affect many respondents it was the clear No. 1 choice.

Source: Flickr user Randen Pederson

On paper raising the full retirement age makes sense as it'd require people to work longer and could encourage additional savings. It would also mean that workers would contribute more into the system, which'll be needed with more people waiting longer to claim their Social Security benefits. The one problem with this method is it could reduce the payouts even further of low-income retirees that need to claim Social Security retirement benefits when they turn 62 in order to survive.

Lastly, aligning the cost-of-living calculation with the Consumer Price Index for Elderly Consumers, or CPI-E, as opposed to just the broad CPI, would be more representative of the inflation seniors face on an annual basis and ensure that inflation doesn't erode retirees' benefits over time.

Do you have a better solution to fix Social Security? Let's hear it in the comments section below.

The article This Move By Lawmakers Could Reduce Select Social Security Benefits By 19% originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.