Like the 401(k) and similar tax-deferred plans, Social Security was designed to be a required savings program in which Americans put away a portion of their earnings during their working years so that they can receive more than the base level of benefits.
That’s what President Franklin D. Roosevelt intended it to be. And that’s what Professor William Reichenstein hopes it will become once again.
Reichenstein believes that Social Security is a great deal for lower-income Americans earning under $45,000 annually because they receive a much larger benefit relative to their contributions than upper-middle class people earning more than $80,000 a year.
He has written a research paper arguing that the system should be reformed to equalize benefits for everyone who pays into it.
“I want to have a required savings program, not an income-redistribution program,” said Reichenstein, professor emeritus at Baylor University and head of research at Social Security Solutions Inc. in Waco, Texas. “What I don’t like is some of the recent proposals that said, ‘Let’s change this almost entirely to a redistribution program."
Reichenstein maintains that the Social Security system is broken. Beneficiaries are scheduled to receive a benefit reduction of about 26% in 2034 if Congress doesn't address a funding shortfall.
He argues that the Social Security system became a pay-as-you-go system and policymakers gave away $11.4 trillion in unearned benefits to people born in 1937 or earlier.
“And now we are paying the price,” he said, adding that Social Security has been a poor investment for people born after 1937.
Reichenstein said the current Social Security system's methodology is calculated on the highest 35 years of working. Benefits are based on average income monthly earnings (AIME), which is the sum of earned income subject to Social Security taxes in a worker’s 35 highest income years, with income before age 60 indexed by the national average wage level, divided by 420, the number of months in 35 years.
AIME is then converted to the primary insurance amount (PIA). For workers who turned 62 in 2016, the formula used by the Social Security Administration is the sum of 90% of the first $926 of AIME, plus 32% of AIME between $926 and $5,583, plus 15% of AIME over $5,583, according to Reichenstein..