The Widows and Orphans program started in the early 1930’s has morphed over the last approximately 80 years into a retirement entitlement for all Americans. It has been changed so many times over the years that I literally lost track.
Here is what you need to know- NO ONE ever pays in enough for what they take out. NO ONE is legally entitled to this; it could be changed or stopped at any time- without recourse. NO ONE has the political will to stop it. Picture it as a huge boulder tumbling down a mountain-side. Would you stand in front of it, even it was heading toward a village to do damage? You get my political point. The reality is we cannot afford the current system and we cannot do away with the current system. So what now?
IF you believe that the current system, although flawed and mathematically devastating, should stay- then we need to make some structural changes. First, uncap the contribution level(current cap is $106,800) like Medicare was back in 1993 so that no matter how much you make Social Security gets paid its percentage from the employee and employer all the way up the income scale. Raise the age requirement to for full benefits to age 70, eliminate or minimize the COLA (cost of living adjustments), and call it a day. And then go cut aggressively in another area.
IF you believe that the current system cannot stay, since it is overwhelming our financial resources and built on the premise of a growing population base- then we need to replace it. Remember- no one besides the truly wealthy are financially able to handle the burden of retirement costs. Most Americans NEED this Social Security money much more than they WANT it. Without it, they could not make ends meet for as long as they live, with all the other tedious and ever rising costs that come with age like health care in general, pharmaceuticals in specific, commodities pushing oil/gas/food products higher still, long term home health services, etc.
Want to get some idea of how out of control the costs have been handled and increased?
Back in 1981 the program covered about 36 MM people, had an earned income cap of $29,700 and cost a total of $126.695 billion. Since then, the programs benefit payout per month has increased by 300%.
Then in 1985, the program covered about 37 MM people, had an earned income cap of $39,600 and cost a total of $171.150 billion. Since then, the program benefit payout per month has increased by 200%.
In 1993, the coverage expanded to 42 MM people, had an earned income cap at $57,600, and a total cost of $273.104 billion. Since then, the program benefit payout has doubled.
Recently, the program covered 53MM people, had an earned income cap at $106,800 and cost $516.192 billion. With boomers retiring, the costs just explode.
Idea- The premise is based on the origin of Social Security when created. IT was designed for the people who could not take care of themselves, not as a blanket retirement perk for all Americans. Having said that- the new model would involve a tier system of ages to receive corresponding benefits. The First tier would be ages 60 and above. They would receive partial benefits at age 60 and full benefits at age 70. My definition of partial would be 50% of full, not the current 25-30% reduction in benefits. They would receive the current maximum benefit, but would not receive any COLA (cost of living adjustment) ever. The Second tier would be ages 45-59. They would receive partial benefits at age 60 and full benefits at age 65. The new full benefit level would be 15% less than now, and partial would be half of that. This would be a fixed benefit and only be increased by a set 1% COLA. The Final tier would be age 44 and under. They would receive partial benefits at age 55 and full benefits at age 60. Their benefit level would be 15% less than the second tier, and partial would be half of that amount. This would be a fixed benefit and only be increased by a set 1% COLA. The Second and Final tier would receive a minimal COLA (say 1% a year) on Full Benefits only.
**Critical to this idea is also 3 qualifiers- you could not receive SS benefits while 1) fully employed 2) having a Net Worth higher than $500,000 excluding primary residence or 3) making more than $40,000 per year in total income (earned or unearned). The point of these qualifiers is to get the money to those who NEED it, not to those who are "ENTITLED" to it. The people who have enough would retire earlier, opening up employment opportunities. People who didn't immediately qualify would qualify eventually as their wealth or income diminished, or they retired (some minimal part time work would still be allowed). Also, the total "credits" needed to qualify for benefits needs to be radically raised. The current figure of 40 credits (takes about 10-12 years of full employment to hit that) is far too low. We should raise that level to about 60-70 credits, keeping people employed longer to qualify for full benefits. Anyone not reaching that level would still receive partial benefits after hitting a lower threshold. Lastly, uncapping the contribution level from the current $106,800 level to unlimited (similar to Medicare in 1993) and opening up additional legal contributions to 401K(and IRAs) for the Second and Final tiers would help offset the lower benefit stream they would receive.
Example- A person is age 60 or above now- they would receive their check of say $900 (partial) or $1800 a month (full) for life. But it would never increase. The current system might increase that by 2-3% each year. The 2% each year (potential) is about $384/yr for every individual in the system. They would start partial benefits at the age of 60 or full benefits at age 70. They would receive benefits only if not fully employed, net worth was less than 500K, and they had an income of less than 40K annually.
A person who is age 45-59 now, would be eligible for partial benefits at age 60 and full benefits at age 65 – 15% less than the First tier, so benefits would be $765 for partial and $1530 for full. But remember, each person would collect from age 65 (two years earlier than current), have a greater legal contribution level into 401K and IRAs, and receive a minimal COLA of 1% on full benefits a year. The same qualifiers would exist about employment, net worth, and income level.
A person who is in the Final tier of under age 45 would get $650 partial benefit and a $1300 full benefit (15% less than the Second tier). BUT remember, they would collect at partial at age 55 and full at age 60. This tier would have the ability to contribute more to 401K (and IRAs) under law, get a 1% COLA each year on full benefits, and not have to meet the net worth or income criteria- although they still would not receive benefits as long as they were fully employed. This Tier and all who follow it would need to hit the raised credit level of approximately 60 to qualify for full benefits, anyone who hit the current 40 credit mark would receive only partial benefits. The Final tier would also be the new “standard” benefit.
Side note- Remember raising the 401K (and IRA) limits? Why not tie that in to the “age” tier system of Social Security. IF someone is going to receive less benefit from SS, then it only stands to reason they will need to fund their retirement some other way. By making this option available, it would help solve for everyone’s benefit.
Side note- Another huge advantage of dropping the qualifying age for Social Security is that some people might choose to stop working earlier, and this would have a positive impact on unemployment as the natural attrition would provide job opportunities for the unemployed and upward mobility for some currently deadlocked in a career by someone above them who cannot, or chooses not to, retire.
Side note- The numbers above do not include the Disability portion of the benefit program. Something worth noting and looking into the validity of would be the recent jump in Disability claims and benefit payments. The number of claims and payments has jumped from a 1981 number of about $16 billion, 1985 numbers of $19 billion, 1993 number of $31 billion, to a 2008 number of $109 billion. See the jump?