Why Social Security Expansion May Stiff the Poor
On January 31, over 200 House Democrats jointly introduced the Social Security 2100 Act, legislation that would expand Social Security both by raising the 12.4 percent payroll tax and by phasing out the current $132,000 cap on taxable earnings. Social Security Works, an activist group that was key to making Social Security expansion the de facto position of the Democratic party, crows that the Social Security 2100 Act would allow “no retiree to fall into poverty.” Not only is that claim untrue, but this budget-busting expansion of the federal government’s already-insolvent retirement program may leave low-income retirees disappointed.
The Social Security 2100 Act is the brainchild of Representative John Larson (D., Conn.), who took the progressive impulse to expand Social Security and turned it into detailed legislation. Larson deserves credit for his efforts. With most members of Congress from both parties willing to go their entire careers without proposing anything to fix Social Security’s $10 trillion–plus funding shortfall, any congressman who does — to say nothing of one who attracts 80 percent of his own party to co-sponsor the bill — should be applauded.
At the same time, legislative details don’t always live up to the talking points.
Let’s look at how the poorest workers would fare in retirement under the Social Security 2100 Act. After all, these are the Americans least able to save on their own for retirement and most at risk of falling into poverty in old age. In theory, the Social Security 2100 Act would provide these low-income workers with Social Security benefit increases of up to 44 percent, a startling figure.
In reality, many would see little difference in their benefits. For one thing, about 20 percent of the lowest-income quintile of U.S. workers fail even to qualify for Social Security benefits, owing to short working careers and Social Security’s ten-year vesting period. These Americans end up relying on Supplemental Security Income, a means-tested welfare program that provides sub-poverty-level benefits while effectively prohibiting beneficiaries from working or accumulating savings. Countries including New Zealand and Canada have universal retirement benefits to protect against poverty in old age, and I have advocated previously for such a benefit in the U.S. The Social Security 2100 Act does nothing to help this fifth of the poorest Americans. It only hikes their payroll taxes during the years in which they do work.
But even many low-income workers who qualify for retirement benefits won’t see much of an increase under the Social Security 2100 Act. Here’s why. First, the Act’s advertised 44 percent benefit increase applies only to low-income workers who work for at least 30 years. Low-wage, long-career workers are unusual, making up only about a tenth of the retiree population. For low earners with shorter careers — the ones most likely to land in poverty in old age owing to a failure to build savings — the Act offers a benefit increase of just 4 percent.
And even these modest benefit hikes may prove to be illusory. Almost 40 percent of very low earners currently receive a supplemental benefit based on a spouse’s earnings. For these “dually entitled” retirees, who are almost by definition low-income, the Social Security 2100 Act may increase the benefit check in their mailbox by very little or nothing. For instance, imagine a couple where the husband’s earnings brought him $2,000 per month in Social Security benefits while the wife’s earnings brought her only $750. Social Security’s spousal benefit would top her monthly check up to $1,000, half her husband’s check. Now imagine that the Social Security 2100 Act boosted her base benefit by 10 percent, to $825 per month. But that $75 per month increase would be deducted from her spousal benefit, leaving her with the same $1,000 total as before. For many of these very low earners, the extra benefits won’t be enough to compensate for the nearly one-fifth increase in payroll taxes they’ll be hit with as the Social Security 2100 Act gradually boosts the current 12.4 percent rate to 14.8 percent.
Now let’s look at workers the Social Security Administration classifies as “high wage” — earning about $88,000 annually over a 44-year career — or “maximum wage,” earning the $132,000 maximum taxable wage throughout their careers. The Social Security 2100 Act promises these higher-paid workers a seemingly stingy 2 percent benefit increase. But because high-wage workers do not receive auxiliary spousal benefits, they are guaranteed to receive their promised benefit hike.
Moreover, higher-income Americans will receive that higher benefit for longer. It’s now well-known that the rich live longer than the poor. A Congressional Budget Office analysis found a roughly six-year difference in life expectancy between the richest and the poorest quintiles of 65-year-old Americans, giving the rich a retirement about one-third longer than that of the poor. The Social Security 2100 Act compounds these longevity differences by increasing Social Security Cost of Living Adjustments (COLAs), a benefit hike that flows disproportionately to the very old, who are disproportionately higher-income.
On top of this disparity, the Social Security 2100 Act reduces or eliminates income taxes on Social Security benefits for retirees whose household incomes range from about $50,000 to $100,000, a well-off group whose incomes have risen rapidly over the past two decades.
Of all the benefit-increase provisions in the Social Security 2100 Act, only one is aimed squarely at boosting benefits for the poorest retirees, and it accounts for just 15 percent of the plan’s additional costs. Benefit-increase provisions slanted toward retirees further up the income ladder use the other 85 percent of additional funding.
Yes, Social Security faces a significant funding gap. And yes, higher taxes are one way to fill it. If Republicans ever want a deal on Social Security reform, they’re probably going to have to live with some tax increases. And they’re going to have to get some new reform ideas of their own if they wish to counter a unified Democratic party pushing the Social Security 2100 Act.
But the Social Security 2100 Act imposes tax increases well beyond what’s needed simply to pay promised benefits in full, which itself is well beyond what is truly needed if we gradually scale down the growth of benefits for middle- and upper-income retirees. It’s not at all clear why the nation should levy higher taxes on rich and poor alike merely to reshuffle most of those dollars to middle- and higher-income retirees. Even from a progressive standpoint, isn’t there a better use for higher taxes than this?
