Proposal Calls For New Formula To Calculate Social Security Benefit

Work Credits

But under a new proposal by the Progressive Policy Institute, one employing “work credits,” the benefit structure of Social Security would take on an entirely new look.

Under the current system, benefits are based on a person’s lifetime earnings during the 35 years they earned the most. The higher the income, the higher the benefits.

“The original purpose behind this is right now the program is financed by payroll taxes,” Ritz said. “It’s to create the perception that this is a benefit you have paid for. If you pay more payroll taxes because you make a bigger contribution, you get a bigger benefit out.”

But there are a few issues with that approach, he said. First of all, it’s not true because higher income people get a lower return on the money coming out than lower income people do per dollar paid in.

A bigger issue is that beneficiaries have only been paying sufficient payroll taxes to finance 80% of their benefits, so it’s not a benefit they have fully bought and paid for because their taxes were not high enough.

And furthermore, he said, it’s regressive. “It creates this system where we are providing the greatest benefits to the people who need them the least—and as we are transitioning to being an older society. And given all the challenges that younger workers are facing right now, we believe that it doesn’t make sense to put the entire burden of financing the benefits for wealthier seniors on struggling workers.”

The institute has thus proposed changing the benefits formula, awarding benefits based on how much someone works, not how much they earn. So if you work the equivalent of 40 hours per week at minimum wage for a year, you get credit for a year of work; for each year of work you have done in your career, your benefit is increased by a flat amount, Ritz explained. Workers who don’t earn enough for the full work credit get a fractional credit rounded to the nearest tenth.

Ritz said the benefits increase the same for the number of years you work whether you are the CEO of a Fortune 500 company, a teacher or a janitor.

Essentially, the plan would cut costs by reducing benefits to retirees who have earned high incomes over their lifetime while alleviating poverty among low-income retirees. This system also incentivizes work because the current arrangement only counts for 35 years of work for the benefit formula, Ritz noted.