Democrats Just Reintroduced a Social Security Reform Bill With a Lot of Support -- but There's a Catch

By Sean Williams Markets Fool.com

You may not like what I have to say, but it's the truth: Social Security is in trouble.

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Social Security is a program that more than 41 million retired workers count on to provide an average benefit of $1,364 each month, according to the Social Security Administration's February data snapshot. A majority of these workers (more than 60%) rely on this monthly check to comprise at least half of their income. But this income, or should I more accurately say a portion of it, isn't guaranteed beyond 2034, according to a 2016 report from the Social Security Board of Trustees.

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The report from the trustees projects that Social Security will begin paying out more money than it's bringing in by 2020, ultimately culminating in all of its spare cash being exhausted by 2034. While the good news is the program won't be going bankrupt -- as long as people keep working, payroll tax revenue will always be generated that can be paid to beneficiaries -- the bad news is a benefits cut of up to 21% may be needed to sustain payouts through 2090. For the aforementioned majority of reliant seniors, this is a terrifying projection.

Social Security needs a fix, and Congress is the only entity that can make that happen. Unfortunately, Democrats and Republicans in Washington haven't been able to come together to find an amicable solution to fix Social Security, despite there being well over a dozen ways to reduce its budgetary shortfall.

The Democrats reintroduced a highly supported Social Security fix

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However, a newly reintroduced bill (it was first introduced in 2014) from Rep. John Larson (D-Conn.) offers a fix that, according to the SSA's chief actuary, would completely resolve the budgetary shortfall over the next 75 years. Instead of the expected actuarial deficit of 2.66% per annum, there would be a 0.32% actuarial surplus, per the calculations. Best of all, the bill has the support of 156 co-sponsors in the House.

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Known as the Social Security 2100 Act, Larson's bill would aim to make six key changes to Social Security:

  1. Increase the primary insurance amount formula factor to 93% from 90% beginning in 2018: The first part of Larson's bill would adjust the primary insurance amount formula factor upward to help increase the amount that seniors are paid from Social Security. It's not a big difference, but it would result in a slightly higher payout for beneficiaries.
  2. Switch COLA to the CPI-E from the CPI-W: Secondly, Larson's bill would abandon the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the Consumer Price Index for the Elderly (CPI-E). Since the elderly make up about two-thirds of all Social Security beneficiaries, it would only make sense that their spending habits are given more weight in the annual cost-of-living adjustments (COLA). The CPI-E only takes into account the spending habits of households with people aged 62 and up, meaning it could be more representative of the medical care and housing inflation seniors face than the CPI-W has been.
  3. Raise minimum benefits to 125% of the federal poverty level: Additionally, Larson's bill would increase the minimum benefit paid by the program to 125% of the federal poverty level, which in 2017 dollars would work out to $14,850. The current minimum benefit pays below the federal poverty level.
  4. Raise the tax thresholds for Social Security benefits: Though it's not a well-known fact, Social Security benefits may be taxable. The annual income thresholds where those taxes kick in, $25,000 for an individual and $32,000 for joint filers, haven't been adjusted for inflation since 1983. Larson's bill would increase these thresholds to $50,000 in annual earned income for individuals and $100,000 for couples. This would allow Social Security recipients in the middle class to presumably keep more of their benefits.
  5. Reinstitute the payroll tax on earned income above $400,000: Fourth, the maximum taxable earnings figure of Social Security's payroll tax would be somewhat adjusted. Currently, all earned income between $0.01 and $127,200 is taxable at 12.4% (most workers split this tax down the middle with their employer, 6.2% each), with any earned income above $127,200 free and clear of Social Security's payroll tax. This allows wealthy individuals the potential to have very little of their income taxed by the program. Larson's bill would reinstitute the 12.4% payroll tax on earned income above $400,000, with a moratorium on earned income between the annually Average Wage Index-adjusted maximum (i.e., $127,200 in 2017) and $400,000.
  6. Gradually increase the payroll tax for all workers: Lastly, it would call for a gradual increase in Social Security payroll taxes for all working Americans of 0.1% per year beginning in 2019 and extending through 2042. This would push the payroll tax from its current 12.4% to 14.8% by 2042. For most workers, we're talking about an average annual increase of 0.05%, or 1.2% cumulative over 24 years.

Image source: Getty Images.

But there's a catch

According to SSA's Office of the Actuary, Larson's Social Security bill would keep the program solvent, boost minimum benefits, and increase benefits for nearly all Americans. It also has, as stated above, 156 co-sponsors.

But there's a catch.

The 156 co-sponsors represent about 80% of the Democrats in the House. Not a single Republican has thrown his or her support behind the Social Security 2100 Act, which is a big problem considering that Republicans control both houses of Congress. Without their support, the Social Security 2100 Act would effectively be dead on arrival (once again).

There are other concerns with the Social Security 2100 Act, too, but that would be expected given that there are two sides to every bill. For instance, there's little arguing that the CPI-E would give seniors a higher COLA more years than not. However, it's still possible that the CPI-E underreports the medical care inflation that seniors are dealing with. The CPI-E doesn't factor in Medicare Part A expenses, which include surgeries, in-patient hospital stays, and long-term skilled nursing care. These costs comprise a sizable portion of seniors' medical care expenditures, meaning seniors may still not be getting the representative COLA they need to cover their most-needed costs in retirement.

Similarly, while increasing payroll taxes on the wealthy has often been a popular choice to generate more revenue for the program, it does little to address the fact that the rich would receive no added compensation from Social Security in return.

It's definitely been encouraging to see Democrats and Republicans producing bills that the SSA's Office of the Actuary deems as complete fixes to its budgetary shortfall, but at some point we're going to need to see a bipartisan bill and have Congress recognize the seriousness of Social Security's issues in order for something to get done.

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