Last week, on the day of the most recent Democratic presidential candidate debate, Massachusetts Sen. Elizabeth Warren unveiled a plan she called “the biggest and most progressive increase in Social Security benefits in nearly half a century.”
The trending progressive candidate’s plan, released just hours before the debate, singled out low 401k balances as among the reasons why it’s “getting harder to save enough for a decent retirement” (more about that below).
Her plan would increase monthly Social Security benefits by $200 for every current and future beneficiary, and would extend the program’s solvency by two decades primarily through increased contribution requirements on the top 2% of earners (those who make more than $250,000 per year).
“While most American workers contribute to Social Security with every dollar they earn, CEOs and other very high earners contribute to Social Security on only a fraction of their pay,” Warren says in the plan.
Current projections from the Social Security Board of Trustees indicate the reserves used to partially fund the system are expected to be depleted by 2035.
Here’s a closer look at some specifics from her proposal:
- Every single current Social Security beneficiary—about 64 million Americans—would immediately receive at least $200 more per month under her plan, or at least $2,400 more per year. The plan notes that in 2019, the average beneficiary receives $1,354 a month, or $16,248 a year.
- The plan would impose a new 14.8% percent payroll tax on wages over $250,000, to be split evenly (7.4%) between employers and employees. Her proposal also would impose a 14.8% tax on net investment income for those making more than $250,000. The current 12.4% payroll tax only applies to wages up to $132,900 this year.
- Updates outdated rules to further increase benefits for lower-income families, women, people with disabilities, public-sector workers, and people of color. It would close loopholes that exempt certain types of income from being counted by the government for Social Security tax purposes.
- Under the plan, any person who has done 30 years of Social Security-covered work will receive an annual benefit of at least 125% of the federal poverty line when they reach retirement age. That means a baseline of $1,301 a month in 2019—plus the $200-a-month across-the-board increase in the plan, for a total of $1,501 a month. Warren notes that’s more than $600 a month more than what that worker would receive under current law.
An analysis of the plan from Mark Zandi, chief economist of Moody’s Analytics, finds Warren’s plan would:
- Immediately lift an estimated 4.9 million seniors out of poverty, cutting the senior poverty rate by 68%.
- Produce a “much more progressive Social Security system” by raising contribution requirements only on very high earners and increasing average benefits by nearly 25% for those in the bottom half of the income distribution, as compared to less than 5% for people in the top 10% of the distribution.
- Increase economic growth in the long term and reduce the deficit by more than $1 trillion over the next 10 years.
Retirement saving too tough?
The impetus behind Warren’s plan––beyond a bold campaign promise––is her feeling that it’s getting harder to save enough for a decent retirement and that Social Security needs an overdue increase.
“A generation of stagnant wages and rising costs for basics like housing, health care, education, and childcare have squeezed family budgets. Millions of families have had to sacrifice saving for retirement just to make ends meet,” Warren says. “At the same time, fewer people have access to the kind of pensions that used to help fund a comfortable retirement.”
As a result, Warren’s plan says Social Security has become the main source of retirement income for most seniors. About half of married seniors and 70% of unmarried seniors rely on Social Security for at least half of their income. More than 20% of married seniors and 45% of unmarried seniors rely on Social Security for 90% or more of their income, the proposal says.
With that average Social Security beneficiary receiving $1,354 a month, or $16,248 a year in 2019, Warren notes that for someone who worked their entire adult life at an average wage and retired this year at the age of 66, Social Security will replace just 41% of what they used to make. “That’s well short of the 70% many financial advisors recommend for a decent retirement—one that allows you to keep living in your home, go to a doctor when you’re sick, and get the prescription drugs you need,” Warren says, adding that future retirees will be worse off unless something is done now.
The proposal notes Congress hasn’t increased Social Security benefits in nearly 50 years, and when Congress discusses the program, it’s mostly to debate about whether to cut benefits by a lot or a little bit.
“We need to get our priorities straight,” Warren says. “We should be increasing Social Security benefits and asking the richest Americans to contribute their fair share to the program.”
While the picture for current retirees is grim, the proposal continues, it’s projected to get even worse for Americans on the cusp of retirement. Among Americans aged 50 to 64, the average amount saved in 401k accounts is less than $15,000, the proposal states, citing figures from 2013 in a 2015 report from the National Institute on Retirement Security.
On average, the proposal says Latinx and Black workers are less likely to have 401k accounts, and those who do have them have smaller balances and are more likely to have to make withdrawals before retirement. The plan notes the gradual disappearance of pensions has been “particularly harmful” to workers of color who are near retirement.
Comparing it to other reform plans
Warren’s plan has some key differences from two proposals recently introduced in Congress, the Social Security 2100 Act introduced by Rep. John B. Larson (D-CT), and the Social Security Expansion Act, filed by Sen. Bernie Sanders (I-VT), one of Warren’s rivals for the presidential nomination, and Rep. Peter A. DeFazio (D-OR).
All of the plans call for the wealthiest Americans to “pay their fair share into the system” as the primary means of increasing benefits. Warren’s plan and its immediate $200 monthly benefit increase is the most generous of the three, while the other two concentrate their benefit increases among low- and middle-income workers and would be phased in overtime. Sanders’ plan would expand benefits across the board, including a $1,300 a year benefit increase for seniors with incomes of $16,000 a year or less.
The Sanders plan would lift the Social Security payroll tax cap and apply the payroll tax on all income over $250,000. Sanders noted in his proposal that “a billionaire today pays the same amount of money into Social Security as someone who makes $132,900 a year because the Social Security payroll tax is capped.”
All three plans would mandate that cost-of-living increases be tied to an inflation index that better reflects the living costs of seniors than the standard CPI in use today.
Warren’s plan would also tackle the issue of mothers being shortchanged by spending career years caring for young children at home or for elderly or disabled family members by providing an earnings credit for each month of caregiving tied to a given year’s median annual wage for individuals.
One key difference between the plans is the amount of time by which they would extend the life of Social Security’s trust fund. Warren’s extension is shorter at 20 years, to 2054, while Sanders’ bill would extend the trust fund surplus by more than 50 year and Larson’s bill would effectively be a permanent extension.
Finally, unlike the other two, Warren’s plan also brings investment income into the Social Security tax system with the 14.8% tax on investment income for households with income over $400,000 for couples and $250,000 for individuals.
For an interesting take on the provisions of Larson’s bill, see Eight Revealing Numbers from the Social Security 2100 Act.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
