OPINION: How to Reform the Social Security System

With Social Security’s finances in the spotlight these days, especially since COVID-19 devastated the U.S. economy, there is no shortage of ideas for how to reform the Social Security System (SS) to restore it to financial solvency. Some proposals have originated in Congress (Social Security 2100 Act) and others have been floated by various “think tanks.” In the latter case, some independent “outside-the-box” proposals advocate entirely scrapping the existing Social Security Act in favor of a “universal flat benefit” program — essentially a program where all recipients receive the same amount regardless of their lifetime earnings history and contributions. This would, they argue, lift many more Americans out of poverty and would allow for a reduction in the Social Security tax burden on American workers. Proponents contend that lowering SS payroll taxes with a universal-benefit program would mean more disposable income available for use, instead, to better save for individual retirement and to bolster the U.S. economy. Lofty goals, but at what cost? 

The universal SS flat-benefit concept has gained traction largely because most Congressional approaches to Social Security’s financial dilemma include raising the payroll-tax burden on American workers. Most currently proposed legislation tackles the issue of a steadily increasing number of Social Security beneficiaries by increasing SS revenue via higher taxes to support a larger number of recipients. That approach, flat-benefit proponents say, will eventually become unsustainable.

The current SS payment methodology is already somewhat progressive in that the benefit formula is weighted to provide greater pre-retirement income replacement for lower-earning workers. The income-replacement rate for low-income workers is about 40 percent, whereas for high-income workers it is considerably less. Nevertheless, today, SS benefits are computed relative to the contributions each person has made to the program. 

Conversely, a universal flat-benefit program would transform Social Security into more of a socialist program where everyone gets the same benefit amount regardless of their contributions — an idea that flies in the face of America’s most basic principles.

Social Security has now entered its ninth decade of providing benefits to American seniors and their dependents. That alone is testimony to the soundness of the program’s basic tenet — benefits are paid relative to contributions made. That’s a sound principle that today keeps about 22 million Americans out of poverty. So, we must ask — is it smart to replace a program that has been a resounding success for more than 80 years, with what is essentially a welfare program? Or is it more prudent to modestly adjust the current program to fit today’s demographic — in effect, “modernize” it? 

The reality is that people are now living much longer. Life expectancy has steadily increased over the years and, thus, the people collecting Social Security today receive benefits for decades. Yet Social Security’s full-retirement age definition has not changed in more than 37 years. But simply changing Social Security’s full-retirement age won’t alone restore the program to solvency, so other “modernization adjustments” are needed. Instead of a socialist, universal flat-benefit program, let’s consider a viable way to maintain the existing SS structure of “benefits paid relative to contributions made.”

The Association of Mature American Citizens (AMAC) has developed and, over several years, fine-tuned a proposal, which will not only restore Social Security to solvency, but also do so without raising SS payroll taxes. This proposal, known as the AMAC Social Security Guarantee and Social Security Plus Initiative (www.amac.us/social-security), advocates making several relatively modest adjustments to Social Security’s benefit formulas to achieve solvency without adding to the current tax burden. Proposed adjustments include the following:

• Adjusting the full-retirement age to recognize that Americans today are living (and collecting benefits) much longer;

•  A guaranteed Cost of Living Adjustment (COLA) weighted to favor low-benefit beneficiaries, using a tiered formula based on household income; 

• Adjust the Delayed Retirement Credit formula to align with reductions for claiming benefits before full-retirement age; 

• Modify the formula for computing the Primary Insurance Amount (PIA) for future high earners to align with the national inflation rate, instead of the Average Wage Index;

• Enhance the current survivor-benefit formula to provide a joint-and-survivor annuity concept; divert current retirement-account penalties — for example: early withdrawal of 401(k) money — from the General Fund to the Social Security Trust Funds; and, 

• Replace the Windfall Elimination Provision (WEP) with a new, less punitive formula.

To address the issue of too many Americans neglecting to save enough for their future retirement, AMAC’s Social Security Guarantee also includes a “SSG-Plus” option, which provides a voluntary special investment mechanism for employees to save for their retirement (and for employers to contribute matching funds). This approach would help ensure that seniors have a sizable “nest egg” as they enter retirement.             

Russell Gloor is a certified Social Security advisor with the Association of Mature American Citizens (AMAC). The 2.3 million member AMAC says it is a senior advocacy organization. Send your questions to: SSadvisor@amacfoundation.org.