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Wade Pfau: Pros and Cons of the Social Security 2100 Bill

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What You Need to Know

  • Retirement expert Wade Pfau highlights the good and bad of the sweeping Social Security bill.
  • One problem is that many fixes only extend to 2026.
  • He says repealing Windfall Elimination Provision and Government Pension Offset would be unjust.

There are lots of pluses and minuses in the Social Security 2100: A Sacred Trust bill, the 100-page Social Security revamp introduced Tuesday by Rep. John Larson, D.-Conn., according to Wade Pfau, professor of retirement income in The American College of Financial Services’ financial and retirement planning Ph.D. program.

For instance, the extension of several Social Security provisions to 2026 in the “Sacred Trust” bill does not go far enough, says Pfau — who also serves as co-director of The American College Center for Retirement Income and director of The American College’s Retirement Income Certified Professional program.

Raising the income thresholds at which Social Security is taxed, though, “would help to reduce the harm of the Social Security tax torpedo,” Pfau explained to in an email to ThinkAdvisor. But he calls the plan to introduce a Social Security tax for those with income of $400,000 and up  “onerous.”

Here are Pfau’s answers, via email, to our questions on the new Social Security bill.

Do you support the proposed use of the Consumer Price Index for the Elderly as the index for Social Security’s yearly cost-of-living adjustment, or COLA, rather than the CPI for Urban Wage Earners and Clerical Workers?

Yes, the CPI-E does better match spending needs for Social Security recipients and does tend to rise slightly faster (this information [in the bill] notes a 0.2% difference, which sounds right) than the CPI-W currently used.

Do you think the proposed payroll tax increase on those earning over $400,000 a year will be enough to shore up Social Security funding? 

No, not really. Even this information notes that the combined impacts only push the date of Trust Fund depletion back by four years, from 2034 to 2038.

The provision about introducing the Social Security tax at $400,000 is onerous. It’s important to understand, that’s a 12.4 percentage point higher tax rate at that level, pushing overall federal income taxes at those levels above 50% before considering state income taxes too. And that’s for Social Security earnings.

The information sheet says this is a way to get billionaires to pay more, but their form of income is probably not covered by Social Security. Maybe that’s why it has such little impact on helping the trust fund.

Will combining the Old-Age Trust and Disability Trust funds make a difference?

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I don’t think so. My understanding is that the distinction between the trust funds is not that important, as it’s very easy to reallocate payroll taxes from one to the other. I’m not sure if there are efficiencies to be had by combining them.

What’s your view on the proposed 2% bump in benefits to Social Security recipients?

In line with everything else outlined in the bill, this doesn’t seem all that necessary. Benefits will already be 5.9% higher next year.

What are your thoughts on other potential impacts of this bill?  

Looking through the provisions, these are some interesting items:

Raising the income thresholds for when Social Security is taxed would help to reduce the harm of the Social Security tax torpedo. Those thresholds were set in 1994 and should be indexed to inflation. But they weren’t. Nonetheless, this only changes the thresholds to 2026 and doesn’t index them to inflation, so it’s not going far enough.

The provision to increase survivor benefits for two-income households is interesting. But again, it’s just temporary from 2022 to 2026, which is odd.

With the CPI-E and the provision to increase benefits again after 15 years of receipt, it is doing a lot to push up benefits late in life. But spending needs usually decline with age.

Repealing the Windfall Elimination Provision and Government Pension Offset would be really unjust, as it allows for double dipping and getting disproportionately high combinations of Social Security and pensions by splitting one’s career between Social Security covered employment and other employment.

The WEP and GPO were created to make the system more fair since Social Security is progressive and people who spend part of their careers outside of Social Security look “poorer” from Social Security’s perspective and get higher relative benefits that the WEP and GPO help to prevent. Eliminating them is a step in the wrong direction.

Stopping the benefit reduction for those at age 60 if the average wage index (or AWI) [goes] down is a great idea and a good fix for the system.