This Proposed Law Increases Social Security Benefits for Multitudes, Yet It Carries a Price Tag
The dismal 2.5% increase in Social Security's cost-of-living adjustment (COLA) for 2025 has rekindled old worries about the program's capacity to adequately support retirees who devoted their careers to funding it. With the program expected to plunge into a deficit within the next decade, the call for Social Security reform has only grown louder.
So far, proposals to modify the program, be it by boosting benefits or ensuring its longevity, have struggled to gain momentum. However, this may be about to shift. As of the afternoon of December 20, the House-passed Social Security Fairness Act was expected to come up for a Senate vote imminently.
This bill aims to enhance Social Security benefits for more than 2.7 million beneficiaries. But this comes at a price that workers and retirees might soon have to shoulder.
What is the Social Security Fairness Act?
The Social Security Fairness Act is a legislation that, if enacted, would do away with two provisions that limit benefits for certain recipients: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The former impacts retired workers with non-covered pensions - pensions paid by employers who do not deduct Social Security taxes from their paychecks. Common with state and local government employees, this type of pension is non-covered. The latter provision affects spouses and surviving spouses of workers who receive non-covered pensions.
The Windfall Elimination Provision (WEP)
As per the current setup, the Social Security Administration calculates most individuals' benefit check amounts by calculating their average monthly earnings, adjusted for inflation, over their 35 highest-earning years (known as their average indexed monthly earnings, or AIME). They then plug this value into the Social Security benefit formula. Here's how it looks:
- Multiply the first 90% of your AIME by $1,174.
- Multiply any amount over $1,174 up to $7,078 by 32%.
- Multiply any amount over $7,078 by 15%.
- Add your results from Steps 1 to 3 and round down to the nearest $0.10.
The result is your primary insurance amount (PIA). The system is designed to provide more replacements for pre-retirement income for lower earners than higher earners. However, those with non-covered pensions don't use this formula.
Workers with non-covered pensions, and thus, fewer years of service, have smaller PIAs. This translates to smaller monthly benefits for life.
The Government Pension Offset (GPO)
The GPO impacts spouses and surviving spouses in a similar manner. It reduces these benefits by two-thirds of the monthly non-covered pension amount. For instance, if a worker qualifies for a $2,000 retirement benefit, their spouse's maximum spousal benefit would be $1,000 under normal circumstances.
However, if that worker qualifies for a $1,000 monthly non-covered pension, the Social Security Administration would deduct two-thirds of this ($667) from the $1,000 spousal benefit, leaving the spouse with just $334 per month. This provision may eliminate spousal and survivors benefits entirely for some workers if the non-covered pension is high enough.
These rules don't impact the majority of Social Security beneficiaries, but they can have a significant impact on the monthly retirement income of those who are affected. It's understandable why they would want these provisions repealed, but the ramifications aren't all positive.
What are the drawbacks of passing the Social Security Fairness Act?
Passing the Social Security Fairness Act would boost benefits for over 2 million retired workers and over 734,000 spouses. However, this would come at a cost - $196 billion to be precise - a sum that the Social Security Administration is currently short on.
The latest projections suggest that the program's trust funds will be depleted in about 2034. After this, benefits would need to be reduced by approximately 23% unless the government implements rule changes to either reduce benefits, increase Social Security taxes, or both.
Congress has acknowledged the problem but has yet to agree on a solution. The longer the issue goes unaddressed, the more challenging it becomes to resolve. Passing the Social Security Fairness Act would speed up the funding shortfall by approximately six months, according to the Congressional Budget Office. This might be enough to dampen the enthusiasm of some lawmakers to pass the bill. We'll have to wait and see what the Senate decides to do, though a decision should be made shortly. As for the bigger issue of Social Security's funding deficit, a solution may still be a ways off.
The Social Security Fairness Act, if passed, would eliminate the Windfall Elimination Provision and the Government Pension Offset, benefiting over 2.7 million retirees and spouses. However, this change would require an additional $196 billion, which the Social Security program may not have due to its projected funding shortage by 2034.
As retirement benefits might need to be reduced by 23% without intervention, the bill's passage could accelerate the funding depletion by approximately six months, potentially reducing the support for its passage in the Senate. The long-term solution for addressing Social Security's financing gap remains an ongoing debate in Congress.
