The 3 worst aspects of social security (and why they will not change) – The Motley Fool

The importance of social security is virtually unmatched in this country. It is a program that delivers nearly 62.5 million people each month and, according to the Center on Budget and Policy Priorities, retains more than 22 million people (a majority of whom are seniors) in Canada. above the federal poverty line.

But, frankly speaking, it's also a program with a lot of fundamental flaws. Although there are many things for the American public who do not like Social Security, the following three aspects of the program are arguably the worst.

1. Taxation of social security benefits

If there is one aspect of social security that is almost universally hated, it is the taxation of benefits. In March 2017, The Seniors Center, a non-profit organization in Washington, DC, released a survey that found that 91% of seniors think that social security benefits should no longer be subject to tax .

Introduced in the 1983 amendments and implemented in 1984, the imposition of benefits allows up to 50% of an individual's benefits to be taxed at income tax rates. federal government if its adjusted gross income plus half of its benefits exceeds $ 25,000. For couples filing jointly, this figure is $ 32,000. Then, in 1993, the Clinton administration created a second tier that allowed for the imposition of up to 85% of an individual's benefits if they exceeded $ 34,000, or 44,000 dollars for couples filing jointly.

When these earnings thresholds were introduced for the first time in 1983 and 1993, they reached about 1 in 10 households and 1 in 5 seniors, respectively. However, a recent analysis of The Senior Citizens League reveals that 56% of seniors pay some form of tax on their social security benefits. This is because the income thresholds associated with the tax system have never been adjusted to account for inflation.

2. The criterion of retirement

A second miserable aspect of social security is the criterion of retirement.

When initially designing in 1935, Social Security Architects assumed that eligible beneficiaries of a monthly benefit would be largely retired. Essentially, the whole benefit was to ensure that low-income seniors who could no longer work had some form of income to rely on when they retired. This, of course, is not the case today, with older people working in their sixties and, in some cases, claiming their right to social security while working.

The retirement earnings criterion is what allows the Social Security Administration (SSA) to withhold part or all of a worker's benefit if its income exceeds a certain level. It only applies to beneficiaries who have reached the retirement age (ie the age at which you are eligible to receive the full amount your payment, as determined by your year of birth). The adoption of the 2000 Freedom to Work for Older Persons Act eliminated the application of the retirement earnings test to people who have reached retirement age.

Beneficiaries who will not reach the full retirement age in 2018 may have deductions of $ 1 on each slice of earnings over $ 17,040. Meanwhile, beneficiaries who reach retirement age at the end of this year, but who are not yet, can deduct $ 1 in benefits for every $ 3 of earnings above $ 45,360.

The good news is that you do not lose the money. It is simply returned to you in the form of a higher monthly payment once you have reached the retirement age. But what stinks is that seniors who want to reduce their debt, pay off their mortgage or pay other costs before they retire may no longer be able to rely on social security as a criterion. of income.

3. The Inflationary Rope for COLA: The CPI-W

It must be said: The inflationary attachment of Social Security is absolutely terrible for the elderly.

Since 1975, the program has been using the Consumer Price Index for employees and urban office workers (CPI-W) as an annual measure of inflation for a predetermined basket of goods and services. It is this inflationary measure that determines the adjustment of the cost of living that recipients receive each year, assuming that inflation is positive.

The biggest problem for the CPI-W is that, although pensioners account for 70% of all beneficiaries, an inflationary measure to track the consumption patterns of urban and office workers of working age is what determines the annual COLA from the program. As you can rightly expect, urban workers and clerical workers have very different consumption patterns from those of older beneficiaries. What ends up happening is that significant expenses for seniors, such as medical care and housing, are underrepresented in the CPI-W. At the same time, lower costs, such as education, clothing, entertainment and transportation, are highlighted. This has resulted in a loss of purchasing power for seniors by 34% since the year 2000, according to The Senior Citizens League.

Here is the kicker: these worst aspects are here to stay

Now, the real boost for social security recipients is that the three worst aspects are unlikely to change anytime soon.

Although the taxation of benefits is extremely unpopular, the income generated each year is essential to keep the program afloat. Last year, taxation of social security benefits brought in $ 37.9 billion out of the $ 996.6 billion raised. By the year 2027, income from tax benefits is expected to more than double to $ 88.1 billion. The federal government simply can not afford to abandon this source of revenue, with Social Security already forecasting a $ 13.2 trillion deficit between 2034 and 2092.

The retirement savings test does not go further. It is designed as a way to encourage seniors to work longer and / or wait longer to get their social security benefit. Working longer gives the program more opportunities to raise tax revenue on wages – payroll taxes accounted for over 87% of total income in the last year. At the same time, forcing older workers to not claim their rights may reduce some of the pressure on the program.

And finally, as long as Democrats and Republicans do not like the CPI-W and feel that it's struggling to pass each year a good increase, there is virtually no chance of achieving a bipartite agreement attaches inflationary. Democrats and Republicans each believe they have the best solution, eliminating the possibility of finding a common ground for a solution.

In other words, we will probably live with these worst aspects of social security for a long time.