Congressman John B. Larson (D-CT) recently put forward the Social Security 2100 Act, a bill which proposes to strengthen the trust fund and increase benefits for current and future beneficiaries. If passed, the bill would provide a roughly two percent increase beginning in 2015, set the minimum benefit 25 percent above the poverty line and raise the threshold for the combined payroll tax.
The bill also proposes to swap the CPI-W for the CPI-E in calculating the cost of living adjustment. Senior advocates have long scrutinized the CPI-W for its focus on food, fuel and other goods most often purchased by wage earners – not retirees. The CPI-E, on the other hand, places greater weight on medical care and other expenses the elderly disproportionately bear.
“If the bill were to pass, the new inflation adjustment would likely have a significant impact for those receiving Social Security benefits,” said Matthew Allen, co-founder and co-CEO of Social Security Advisors. “Historically, the difference between the CPI-E and CPI-W between 1982 and 2011 has been about two percent, and the CPI-E has always been higher.” Given 2014's $1,294 average monthly benefit for retired workers, the switch could provide a roughly $300 per year increase if implemented in the next year.
According to the SSA, the bill also proposes several measures to pay for the benefits boosts and strengthen the Social Security Trust Fund:
• A gradual, one percent increase in the contribution rate from 2015 to 2037.
• A requirement for collecting payroll taxes on wages above $400,000 (currently not collected on wages over $117,000).
• An increased allocation of payroll taxes to the Disability Insurance and Old-Age and Survivors Insurance Programs.
Perhaps the bill's most controversial funding-related measure is its proposal to invest up to25 percent of the Trust Fund in equities by 2025. “There are precedents through several other government programs that have successfully invested in index-based products with successful oversight, and it could improve the overall rate of return on the Trust Fund,” said Allen.
Despite the precedent, Social Security trustees have never been granted the authority to invest, and given the Republicans' hold on both the House and Senate, Larson's overall plan may not be politically viable. “It's probably going to be difficult to get Republican support on six of the eight provisions – the ones which increase benefits or raise taxes,” said Allen. “They don't generally like to push things through that a Democrat is proposing, and vice versa.” While the GOP may favor the idea of investing part of the Trust Fund, the bill has yet to gain any Republican co-sponsors.
Still, Social Security expansion is gaining momentum among voters. According to a study by Social Security Works and the Center for Community Change, 90 percent of Democrats, 73 percent of Republicans and 73 percent of independents support an increase in Social Security benefits paid for by greater taxation of millionaires. Regardless of political affiliation, retirees and pre-retirees are facing still-low interest rates, an increasingly volatile stock market and medical costs that are far outpacing the cost of living adjustment.
Why the disparity between voters' preferences and politicians' positions on the issue? “One big issue is the tenure of politicians,” said Allen. “Since the Trust Fund is expected to exhaust by 2033, this is essentially a 20-year problem. As we get closer to 2033, current politicians will actually have to do something.”
If this bill or a similar bill does eventually pass, however, it could have implications for the ways retirees treat their overall portfolios. With 25 percent of the Trust Fund invested in equities, “clients might need to re-balance other assets to be more conservative,” said Allen. “Some advisors look at Social Security as an entirely separate entity, and that has to change. For most Americans, it's the single largest source of retirement income.”