Whether you're already retired or plan to retire at some point in the future, the chances are high that you'll be reliant on Social Security to some varied degree to make ends meet during your golden years.
Back in April, national pollster Gallup surveyed nonretirees to gauge how reliant they expected to be on Social Security income when they do hang up their work coats for good. A record 38% of respondents expect it to be a "major source" of retirement income, with another 47% believing they'll lean on the program as a "minor" income source. Only 15% of respondents believe Social Security income will be unnecessary during retirement. This is fairly consistent with the 10% of retirees surveyed by Gallup who aren't reliant on Social Security income.
Social Security is a force against poverty
In many respects, Social Security is a saving grace. It's providing monthly benefits to more than 65 million Americans, many of which are seniors. Although 72% (almost 47 million) of beneficiaries are retired workers, the program provides long-term disability coverage to more than 9 million disabled workers and their immediate family, as well as 5.8 million survivors of deceased workers.
Social Security has worked wonders to lower the poverty level, too, especially for seniors. An updated analysis from the Center on Budget and Policy Priorities in February 2020 estimates that, without Social Security, 21.7 million more Americans would be living in poverty. Across all age groups, the program has lowered the poverty rate from an estimated 18.5% to 11.8%. Among the elderly (aged 65 and over), the poverty rate would be pushing 38% without Social Security, as opposed to the 9.7% with Social Security.
The program's 65 million-plus beneficiaries are also in line for what could be the most robust "raise" in nearly four decades. According to a recent estimate from The Senior Citizens League (TSCL), a nonpartisan senior advocacy group, Social Security's cost-of-living adjustment (COLA) in 2022 is forecast to come in at 6%. For the average retired worker, we're talking about a nearly $100 bump in monthly payout.
On the surface, Social Security looks like a fantastic program that's making real headway in the battle against poverty. But in many ways, it's also failing our nation's seniors.
The purchasing power of Social Security income has been declining at an alarming rate
One of the most blatant examples of the program failing those it was designed to protect can be seen in the erosion of Social Security income purchasing power since 2000.
Every year since 1975, the program has been tethered to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as its inflationary measure. If the price of a predetermined basket of goods and services increases in cost from one year to the next, beneficiaries should receive a commensurate increase in their monthly payout to keep them on par with inflation. This is why I referred to beneficiaries receiving a "raise" in quotation marks earlier. These benefit increases aren't designed to help recipients get ahead.
The problem is that these "raises" aren't coming close to keeping seniors on par with the prevailing inflation they're contending with. A recent update from TSCL estimates that the purchasing power of Social Security income has declined by 32% for seniors since the beginning of 2000. Put another way, what $100 in goods and services could purchase in 2000 can now only buy about $68 worth of those same goods and services.
As its full name implies, the CPI-W tracks the spending habits of urban and clerical workers who, in many cases, are working-age Americans not receiving a Social Security benefit. These workers spend their money very differently than senior citizens. This results in important expenditures for seniors, such as shelter and medical care, getting underweighted by the annual COLA calculation, while less-important costs, such as apparel and education, bear higher weightings.
Taxation threatens take-home benefits
I wish I could say that eroding purchasing power is all seniors are contending with, but it wouldn't be the truth. Their Social Security take-home benefits are also being threatened by taxation.
Back in 1982, Social Security's trust fund ratio was down to 15%, which is a fancy way of saying that the payout schedule at the time wasn't sustainable without reform. The Social Security Amendments of 1983 instituted a number of changes, including a staggered increase to the full retirement age over four decades and a gradual increase to the payroll tax on all working Americans.
It also introduced a tax on Social Security benefits, which began in 1984. Persons and couples whose modified adjusted gross income (MAGI) plus one-half of benefits topped $25,000 and $32,000, respectively, would have up to half of their Social Security benefits subject to federal ordinary income tax rates. A second tier of taxation was introduced in 1993, which allowed up to 85% of Social Security benefits to be taxed for persons and couples exceeding $34,000 and $44,000 in MAGI plus one-half benefits, respectively.
The problem is simple: These income thresholds haven't been adjusted for inflation, ever. What was once a tax that was expected to affect around 10% of all senior households when implemented now impacts close to half of all aged households. The effects of inflation will more than likely increase this figure over time and reduce take-home benefits.
There's no easy fix
The real kicker here is that lawmakers in Washington know these issues exist. Both sides of the political aisle agree that the CPI-W does a poor job of calculating the true inflation that retired workers are contending with. They're also generally sympathetic to the fact that the taxation of benefits hasn't been adjusted for inflation in 37 years (and counting). Unfortunately, change is highly unlikely.
When it comes to replacing the CPI-W, Democrats and Republicans on Capitol Hill are approaching their solutions from completely opposite ends of the spectrum. With neither side willing to cede any ground, the CPI-W should remain in place as the program's inflationary tether for a long time to come. This means more erosion of purchasing power should be expected.
Meanwhile, lawmakers also understand that Social Security needs as much as revenue as it can get. The 2021 report from the Social Security Board of Trustees estimates that the Old-Age and Survivors Trust Fund will only be able to pay benefits on the current schedule, including annual COLAs, through 2033. Adjusting the taxation of benefits income thresholds to account for inflation would further cripple the program.
As a whole, Social Security remains an invaluable resource for pulling low-income elderly Americans out of poverty. But in many other ways, it's failing the broad group of individuals it was designed to protect.
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