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Rescuing Social Security: Benefits

Copyright © 2004, 2005, 2013 by David E. Ross

If a married person retires, his or her spouse can also collect Social Security benefits without regard for having worked or ever paid Social Security taxes. My wife has worked and paid Social Security taxes. However, when she retires and we both begin collecting benefits, she will receive a benefit of almost 45% of my benefit merely because she is my wife, about 1/3 more than the benefit she would collect based on her own working history. If I die, my wife will then collect my full benefit, not 45% of my benefit.

If a man marries right out of high school at age 18 and then divorces after 12 years of marriage, his ex-wife can collect the spouse's benefit even if he remarries. He could indeed remarry immediately (age 30) and divorce after 11 years (age 41) and remarry yet again. The only requirement is that the ex-spouse has not remarried, they were married at least 10 years, and the ex-spouse could not get a better benefit on her (or his) own employment history. The man (in this case) suffers no loss of benefits even though his "stepwise polygamy" could easily multiply spousal benefits four times relative to what my wife would receive.

Some workers have their Social Security benefits reduced because of pensions resulting from working for a government agency. For example, take two individuals who have identical employment histories in private industry. However, for 15 years, one of those individuals worked instead for a county from which he earned a pension and did not participate in Social Security (paying no Social Security taxes and earning nothing towards a Social Security benefit). The other individual took the same 15 years and loafed without working at all (maybe supported by a rich brother). With the same employment history with respect to Social Security, the second individual could receive a greater benefit because the county pension for the first individual is used to reduce his or her Social Security benefits.

Currently, benefits are determined entirely from a person's wage and salary history. Other forms of income are ignored (e.g., interest, annuity payments from a lawsuit judgement).

Other quirks and inequities exist. These would be eliminated by reforming the entire benefits structure.

Under the current benefit formula, a single person starting work at age 18 and working until age 67 earning a constant $40,000 per year would receive a benefit of $17,052 per year. Thus, after 49 years of work, the retirement benefit replaces approximately 43% of a worker's wages or salary. The following benefit reform is also intended to replace about 43% of a person's income after 45 years of accumulating benefits. In many ways, it reflects the way employer pension plans operate.

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Basing the benefit on AGI has two obvious results:

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Basic Benefit: Each year, a person would accumulate a benefit equal to 0.95% of his or her adjusted gross income (AGI) reported when filing an income tax return. This is the taxable income prior to subtracting any deductions or exemptions. Thus, not only income from wages and salaries is counted towards the benefit, but also self-employment and partnership income as well as dividends and interest.

Vesting: Benefits would accumulate starting at age 18 and stop accumulating the year in which benefits are first paid. Anyone who accumulates benefits in ten consecutive years (similar to today's requirement for 40 quarters) or over a total of twenty years — by filing federal income tax returns with non-zero AGI — is entitled to a benefit. Note that benefits are accumulated in whole-year increments because tax returns are filed annually.

Spousal Benefit: The spousal benefit that exists today would be eliminated. When a married couple files a joint tax return, each spouse would accumulate a benefit based on half the AGI. This accumulation would then be unaffected by divorce, death of a spouse, remarriage, or any other change in family situation. Each spouse would receive his or her own benefit, unaffected by whether the other spouse has begun receiving benefits.

In a married couple where one spouse is under 18 or already receiving benefits, the other spouse would accumulate benefits based on half the AGI.

Once a couple is divorced and can no longer file joint tax returns, each ex-spouse separately accumulates further benefits based their single tax returns. There is no minimum number of years for a couple to be married. A marriage of only one year results in one year of accumulation through a joint tax return.

Minimum and Maximum Accumulations: Over a person's lifetime, there would be no lower or upper limit on accumulations. However, in any year a person files a tax return, he or she would receive at least some minimum accumulation but not more than some maximum accumulation. Using the all of the prior year's tax returns, the IRS would categorize AGIs, taking half the amount on joint returns and counting each as two returns. The level of AGI at the 15th percentile would determine the minimum accumulation in the current year; the level of AGI at the 85th percentile would determine the maximum accumulation.

One factor about which few individuals think (because its morbid) is that every year you delay retirement, you gain two years advantage in paying for it: You have one additional year accumulating savings, pension benefits, and Social Security benefits; and (the morbid part) you have one less year in which to spend that money.

Copyright © 2003 by David Ross

Retirement Age: The standard retirement age would be 65, at which point the full basic benefit could be obtained. A person could retire as young as 55 or as late as he or she desires. For every month early or late, the benefit is adjusted actuarially for the remaining years of life expectancy. Of course, retiring early usually means fewer years of accumulation of benefits while retiring late could mean more years of accumulation. The actuarial adjustments would ignore any effects of gender on longevity, instead using combined male and female longevity statistics.

In the first year of benefits, the last incremental accumulation is ignored because some beneficiaries might start receiving benefits before 15 April (when income tax returns are due) and thus before the final increment is known. Benefits are then recomputed to include the last incremental accumulation, with payments adjusted starting the following January. Based on that recomputation, retroactive benefits are paid (without interest) spread over the same number of months as benefits were paid in the first year (e.g., if you started receiving benefits in May, you would receive retroactive payments spread over eight months in the following year).

Inflation: Using the "all urban consumers" consumer price index (CPI, CUUR0000SA0) as a measure of inflation, accumulated benefits would be adjusted up or down each year. Once benefits begin being paid, they too are adjusted according to changed in the CPI. Thus, the purchasing power of the benefits would be preserved.

The Urban Wage Earners and Clerical Workers Wage CPI (CWUR0000SA0) — the current index used to adjust for inflation — is meaningless for retirees by exluding spending patterns of the self-employed, salaried workers, and retirees.

The Chained CPI (C-CPI-U) assumes that, when prices rise, consumers switch their spending to lower-cost items (e.g., switching from steak to hamburger. Proposals to use C-CPI-U to adjust Social Security benefits for inflation would thus lead to long-term degredation of retirees' standards living. Retirement should not mean a slide into ever worsening poverty, a slide guaranteed by C-CPI-U.

Coverage: All adults (18 or older) filing income tax returns would be covered by Social Security. This includes foreign nationals working in the U.S. for only enough years to become vested and employees of state or local governments who are currently exempted. Members of religious orders and others who currently have religious exemptions from the Social Security program would be covered, too; if their beliefs prohibit them from accepting benefits, they could assign their benefits to religious organizations.

U.S. citizens residing in foreign nations and paying taxes there — and thus not filing U.S. tax returns — would not accumulate benefits during that time. Such persons could still receive benefits if enough U.S. tax returns had been filed to become vested.

Offsets and Double-Dipping: I worked for 24 years for Unisys and then six years for TRW, vesting in retirement plans at both employers. My pension annuity from Unisys was in no way affected by the fact that I received a lump-sum settlement of my pension benefits from TRW (or if I had chosen to receive an annuity from TRW). This is called double-dipping and is quite common in private industry.

However, the current Social Security program uses a windfall offset to reduce benefits to retirees who also receive a pension from a state or local government. This would be eliminated. Anyone becomes vested in Social Security retirement benefits would receive those benefits without regard for other pensions — public or private — or personal resources. To provide otherwise would impose a means test on the program, contrary to the goal of this reform.

Similarly, a person could "retire" and receive benefits while still working or otherwise earning an income. There would be no loss of benefits just as there is no loss of private pension benefits when someone retires and then goes to work elsewhere. However, in this case, the accumulation of additional benefits would stop once benefits start being paid.

Joint Benefits: If one spouse of a married couple dies, the other spouse would still receive his or her personal benefit. If their benefits accumulated entirely through the filing of joint tax returns, that would be half their joint benefit.

For a married couple, however, a person applying for benefits could choose an irrevocable reduction in benefits by selecting a joint benefit, paying his or her surviving spouse 25% or 50% of the reduced benefit after that person dies. The amount of reduction would be determined actuarially based on the ages of the spouses. In the meantime, the surviving spouse would also receive a personal benefit (which is why the joint benefit is limited to not more than 50%). Each spouse could independently select the option for joint benefits for the other spouse. Joint benefits would be available only for couples married at least one year and filed at least one joint income tax return before the first spouse applies for benefits. Remarriage after one spouse dies would not affect the benefit of the surviving spouse even if that survivor were receiving a joint benefit of 25% or 50% of the dead spouse's benenfits. However, if the surviving spouse also had selected a joint benefit on behalf of the spouse who died, that choice remains irrevocable and cannot be transferred to a new spouse.

If there is a divorce before the second spouse applies for benefits, the first spouse could terminate the joint benefits (unless prohibited by the divorce decree) and begin collecting his or her full benefits. However, any past reduction in benefits could not be recovered. The application to terminate joint benefits could occur only during the period beginning 12 months after the final divorce decree is granted and ending 18 months after the final decree. If the second spouse applies for benefits after being served with a notice that a divorce action has begun, that does not prevent a termination of joint benefits.

Under this plan, a single person starting work at age 18 and retiring at age 65 and earning $35,000 per year would accumulate a benefit of 47 years times 0.95% of $35,000 or $15,628 per year. Currently, that person would receive $13,476.

A married couple — both spouses the same age — with a joint income of $60,000 per year starting at age 20 and retiring at age 65 would accumulate two benefits of 45 years times 0.95% of $30,000 or $12,825 each. If they stay married, they would share a benefit of $25,650. Currently, that couple would receive $28,512 if one spouse earned the $60,000 and the other earned nothing. If they each actually earned $30,000 each, their combined benefit under the current program would be $24,168.

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