The promise to guarantee Social Security for all Americans must be kept. AMAC has examined the many proposed solutions presented in the Intermediate Assumptions portion of recent Trustees Reports and selected the alternatives we feel are best suited to save Social Security’s retirement trust fund. We have combined these selected assumptions with several other recommendations to achieve what is the best path to long-term trust fund solvency without raising taxes.
AMAC’s proposal has three Prime Directives:
We believe the proposal presented here succeeds in achieving all of these directives.
(Note: For purpose of illustration, the 2020 fpt threshold in the continental U.S. for one-person households is $12,760, with an additional $4,480 per household member. Thus, for a two-person household, the 150% fpt limit would be $25,860. In Hawaii and Alaska, the fpt thresholds differ (Hawaii +15%, Alaska +25%) as does the per family-member multiple (Alaska $5600, Hawaii $5150)
When The Social Security Administration announces the COLA each year in October, the percentage increase announced will be applied to the average Social Security benefit in effect at that time. THAT dollar amount will be applied to ALL beneficiaries effective the following January 1st. See chart below for an illustration of this in practice.
|Soc Sec Benefit||3% COLA to All||Same Dollar Amount to All||Difference|
Note: In 2009, 2010, and 2015, the COLA calculation did not yield a positive COLA adjustment for the following year, despite the fact that expenses most common to seniors (e.g., food, insurance, medical treatment, prescription drugs, etc.) continued to rise sharply. Under the AMAC Social Security Guarantee plan, all retirees will be guaranteed an increase each year, although any Medicare premium increase could offset the value of a guaranteed COLA.
The AMAC Social Security Guarantee prototype plan combines the provisions shown above and includes the addition of a new benefit that we believe Social Security must include if it is to help and encourage workers to secure a sufficient retirement.
The “Social Security Plus” account will be a supplemental voluntary companion benefit retirement account to provide access to additional funds for all workers at age 62.
Fifty million Americans have no retirement plan, and the average person receiving retirement benefits collects slightly more than $16,000 per year. Accordingly, the majority of retired workers rely on Social Security as the largest portion of their retirement income. For many Americans, Social Security is their only source of income. There is an urgent need to help workers save more for retirement.
|Example: Turn $25/week into $1 million at age 65.|
A 23 year old employee contributing only $25/week in the first year and an employer contributing $15/week, with both adding 4% annually thereafter, in a mix of 80% stock funds and 20% conservative investments, would accumulate over $1 million by age 65.
* Historical average returns
|Age||Individual Contributions including Growth||Employer Contributions including Growth||Total|
|Effects of Proposed Changes|
|Long-Range Actuarial Balance||Annual Balance in 75th Year||Description||Source|
|-2.66||-4.35||From 2016 Trustees Report|
|+1.01||+2.21||Retirement Age Setback||H.R. 5747 Section 4|
|+1.00||+2.64||Progressive Price Indexing for PIA (50th percentile)||Office of the Chief Actuary; 2016 Trustees Report intermediate assumptions|
|+.60||+.92||Reduction of drop-out years in PIA calculations for SSDI||Office of the Chief Actuary; 2016 Trustees Report intermediate assumptions|
|+0.06||-0.14||Enhanced Survivor benefits||Bipartisan Policy Center Proposal, Table A|
|+.01||+1.28||Net Change in Balance assumptions|
These changes will assure the continuation of Social Security benefits for future generations of Americans
Tiered COLA Approach
Based on IRS data, 149 million tax returns filed in 2015 (2014 tax year) included 27 million containing Social Security benefits. Using this data, we calculated average AGIs and Social Security benefits for the three AGI brackets addressed in the AMAC Guarantee’s COLA proposal. We then modeled these averages to show what the COLAs would be at the high, mid, and low levels (3%-3.5%-4% for low incomes; 1.5%,-2.25%-3% for middle incomes; and 1%-1.5%-2% for high incomes) and compared these two a hypothetical inflation rate of 2.7%.The results indicate that the AMAC proposal is sustainable using the low to mid percentages in the recommended COLA range. Using the high end of the AMAC exceeds the 2.7% inflation factor slightly.
Retirement Age Setback
For those born before 1954, the normal retirement age (NRA) is 66, gradually advancing to age 67 for those born in 1960 or later. Increasing the NRA by 2 months per year until the NRA reaches age 69 for those attaining age 62 in 2034, and thereafter increasing the NRA in a manner that will keep the ratio of (life expectancy at NRA)/(NRA-20) constant, is expected to result in an increase in the NRA of one month every two years. The age up to which delayed retirement credits can be earned would likewise advance, but stay on the same schedule as currently in effect (3 years past the NRA). The effect of this change is a long-term reduction in the gap between promised benefits and required payroll revenue of roughly 2.21%.
Progressive Price Indexing for PIA (50th percentile)
Social Security uses average wage indexing (AWI) to adjust the bend points used in the Primary Insurance Amount (PIA) calculation each year. In 2014 and 2015, AWI produced increases of 3.55% and 3.48%, respectively. The recommendation calls for no change from this approach for workers with AIMEs at the 50th percentile and below, but calls for the upper two bend points for those above the 50th percentile to be adjusted using inflation rates, which tend to be lower (e.g., the CPI-W for 2015 was negative, but the AWI resulted in a positive 3.48% bend point change). Over the 75-year horizon, this change to the Social Security benefit calculation is expected to eliminate 38% of the shortfall by reducing the gap between promised benefits and required payroll tax revenue by 2.64%.
Reduction of drop-out years in PIA calculations
In calculating the SSDI benefit level, up to five years of a worker’s lowest years of earnings are eliminated or “dropped” to minimize the effect of lower years of earnings on monthly payments. An eligible worker who becomes disabled has one year of earnings dropped (via the disability dropout year provision) for every five years of earnings, known as the one-for-five rule. The proposal is to gradually reduce the maximum number of drop-out years from 5 to 0, resulting in inclusion of the lower earnings years in the SSDI calculation. The net effect is that including the lower earning years will reduce the amount of the benefits to be paid, translating to a long range reduction in the actuarial deficit of 0.60 percent of taxable payroll, and the 75th year annual deficit by 0.92 percent of payroll.---
Enhanced Survivor benefits
Currently, surviving spouses receive the higher of their individual benefit or the deceased spouse’s benefit. Beginning for newly eligible retired workers and spouses in 2022, surviving spouses would receive 75 percent of the decedents’ benefits, in addition to their own. Under this calculation, surviving spouses would receive a significantly higher benefit. For example, a spouse receiving a $2,000 benefit and a dependent spouse receiving a $1,000 benefit together receive $3,000. Under current law, if spouse A dies, spouse B receives the larger of the two benefits (in this case, $2,000). Under the proposed calculation, spouse B would receive $2,500 (the original $1,000 plus 75%0f Spouse A’s benefit ($1,500) for a total benefit of $2,500, a total increase of $500 or 25%. Interestingly, this tweak results in slight negative impact on the 75th year annual deficit projection, but the other tweaks still produce an improvement in the projection.
The Social Security Plus account
The Social Security Plus Account provides a means for all earners to have more income available at retirement through an individual, discretionary retirement savings plan structured as a “starter savings account.” The provision would offer greater benefits and incentives for users and would put control of their plans in the hands of a volunteer board of investment experts, with the cost of administration borne by the same providers who offer those plans, not the federal government. Conservative estimates are that future retirees could augment their financial plans by $250,000 to $500,000 with a modest investment approach, and by over $1 million with regular employer contributions.
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