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Eliminating Social Security’s ‘windfall’ would be an injustice – Twin Cities

Eliminating Social Security’s ‘windfall’ would be an injustice – Twin Cities

Portrait of Edward Lotterman
Edward Lotterman

Consider the following situation: Two people are retiring. One worked entirely in a government job not covered by Social Security because he had his own retirement system. The other worked entirely private jobs requiring FICA.

You convert everyone’s lifetime earnings to 2024-equivalent wages and find that both were solidly middle class, averaging $5,000 a month in 2024 dollars. The retirement checks each will receive are calculated.

But wait a minute! A final review of the records shows that each earned on average $6,000 a month over their working lives, not $5,000. Result: one’s monthly retirement check increases by $900, but the other’s by only $320. In both cases, the increase concerns their Social Security benefit.

Is this fair?

Well, at least 62 members of the U.S. Senate think not. They don’t like the current laws that allow this difference and want to end the outcome described above.

Yes, the issue of “elimination of windfall benefits” for civil servants is complicated, difficult to explain and understand. So, the concerned retirees who feel mistreated are sincere. However, the senators who demagogue the issue should be better informed. Their predecessors in 1983 clearly did so.

The confusion comes from a collective lie we Americans tell ourselves and cling to like a holy cross. The reason is that Social Security is not “welfare”: it does not take money from some people and redistribute it to others. This would be “feel good” and should be despised.

The lie that the majority of the population believes is that Social Security is just a mandatory savings program. We contribute to this through FICA taxes on our wages and salaries. This earns interest. Then, in retirement, we just “get our own money back.”

Yes, many people, when pressed, recognize that Social Security includes insurance protecting those who become disabled or are survivors of covered workers.

But almost everyone thinks retirement benefits are, or should be, the heart of the program. We have contributed, we should just get back our own invested savings plus interest. Fortunately for a just society, this is not the case.

Here’s the real deal: Social Security was designed from its beginnings in 1935 to reduce poverty. Everyone would pay in and get out, but, to reduce absolute poverty, lower-income people would receive more relative to the taxes paid to FICA than higher-income taxpayers. As income increases during working years, benefits decrease in retirement.

The “replacement rate” of monthly benefits paid in relation to the average monthly salary would be very high for a low starting income bracket. Then, this ratio would decrease in two stages for the highest incomes. Everyone would benefit from at least a basic income when they get old.

Thus, Social Security is, as it is designed, a program that redistributes income from higher-income households to lower-income households. It is the largest income redistribution program in the history of civilization. In addition, more than half of the population receives benefits greater than the actuarial value – capital plus accumulated earnings – that they paid into it. Some people get mad when they are told this, but it’s the truth.

Understanding all of this, be aware that the methods for determining average earnings and the formulas for calculating the corresponding benefit amounts have changed several times since benefits were first paid 85 years ago. So the details of what’s happening today weren’t necessarily true in 1955 or 1975. However, over the past four decades the system has remained fundamentally the same.

First, a person’s annual covered lifetime earnings are listed by year. Then the dollar amount for each year is converted to the equivalents of the current year, i.e. 2024, using an index of the increase in national wages over that period. For 2024, for example, a salary of $5,000 in 1964 would be multiplied by 14.5579418, the factor by which salaries have increased over 60 years. The result would be an amount of $70,790 for 2024.

These equivalents of the current year indexed on salaries for the 35 most remunerative years are added. This sum is divided by the total number of months to calculate the “indexed average monthly salary”. Understand that many different revenue models, over time, could produce the same AIME.

For 2024, the actual monthly benefit paid begins at 90% of the first $1,226 of the person’s average indexed monthly salary. Then, 32% of any AIME between $1,226 and $7,391 is added. For any amount above $7,391, the addition to benefits corresponds to 15% of his average indexed monthly salary up to $14,050, or one-twelfth of the $168,600 imposed this year. For 2024, any annual income over $168,600 is not taxed for FICA.

The result is a “principal” amount for someone who retires at age 67. Retiring from age 62, when benefits first become available, to age 67 receives less amount per month, and waiting from age 67 to age 70 receives more. After age 70, the amount one can receive does not increase.

This formula obviously does not give everyone exactly the same “return” on FICA dollars paid.

In 1935, Congress wanted people with the lowest incomes to receive basic minimum benefits close to a decent standard of living. After that, benefits would increase with the FICA payment, but not in a constant proportion. After passing the first “inflection point,” the overall “replacement ratio” of benefits relative to past average earnings would tend to decline.

Setting aside protections for survivors and the disabled, typical old-age beneficiaries, as a group in the 90% bracket, receive far more than what FICA pays plus interest. Of course, this varies between individuals. And the top group above the 15% threshold receives less than the value of what they contributed. So Social Security old-age benefits actually redistribute income – substantial amounts of it.

And they should do it.

Yes, while most retirees feel better thinking they’re not getting money from someone else’s taxes, and most workers would rather believe their FICA payments aren’t going to anyone else. another, it’s just not true for many. As with private insurance policies, the premium paid, plus the amount earned through interest and investments, is paid to another policyholder who has immediate needs. The drafters of the law wanted low-income people to get a higher proportional return than high-income people, even if that meant taking some of the money paid to high-income people.

This desire to use Social Security as a poverty reduction mechanism in addition to a mandatory savings vehicle leads to controversy over the rate of Social Security benefits that public sector employees deserve on low incomes in the private sector covered by FICA.

If someone receives, say, a public pension of $6,000 per month, does justice require that they continue to receive 90% of the average salary covered by FICA, just like a dishwasher does or a food truck driver with no other pension? Or should they benefit from the 15% that a private-sector employee with a $3,000 monthly benefit gets on their last few dollars of historical earnings?

Most people who understood the problem in 1982 thought that giving 90% to people with high overall retirement benefits was unfair. With the vast reforms of 1983, in-depth reflection was carried out to correct this inequity. Unfortunately, this was called a “reduction” rather than an “adjustment” or “correction.”

Nonetheless, Congress passed the changes with large majorities in both parties and both houses. Democrats voted yes by 163-54 in the House and 26-6 in the Senate. GOP yes votes were 80-48 in the House and 32-8 in the Senate. The only member of Minnesota’s 10-person congressional delegation who voted no was Republican Rep. Arlen Stangeland of the rural 7th District in the western part of the state.

So, 40 years ago, a prudent Congress voted for fairness. But since then, demagogues have attacked popular misunderstandings. The question today is whether their populism goes against fairness.