Compliance February 17, 2023

Senators Sanders and Warren Introduce Social Security Expansion Act

The bill, proposed this week, aims to make Social Security solvent for 75 years and to increase benefits, especially for lower-income workers and retirees.

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The Social Security Expansion Act, introduced earlier this week by Senators Bernie Sanders, I-Vermont, and Elizabeth Warren, D-Massachusetts, aims to make Social Security solvent through the end of the 21st century, while also enhancing benefits.

The bill would create a tax of 12.4% on investment income for individuals making $200,000 or more and married couples making $250,000 or more, matching the combined employee and employer payroll rates.

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The bill would also make all income greater than $250,000 subject to the full Social Security payroll tax rate; currently, income greater than $160,200 is not subject to the full payroll tax rate. Under the bill, income between $160,200 and $250,000 would not be taxed differently at first, but the $160,200 threshold would be allowed to rise normally until it reaches $250,000, projected to happen in 2035. At that point, all income would be subject to the full payroll rate. Additionally, any income greater than $250,000 would not be counted for benefit calculation purposes.

Since the bill would raise taxes, it must be formally introduced first in the House of Representatives. Sponsored in the House by Representatives Jan Schakowsky, D-Illinois, the bill was referred to the House Committee on Ways and Means on Tuesday. The bill has 26 co-sponsors in the House, as of today, all of whom are Democrats. Republicans control the House, and the Committee on Ways and Means is chaired by Representative Jason Smith, R-Missouri.

A statement from Sanders’ office said the bill would make Social Security solvent for at least the next 75 years, based on a study conducted by Stephen Goss, the chief actuary at the Social Security Administration.

Goss’ report explained that the bill would change the cost-of-living index used to calculate Social Security benefit increases from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E). The report estimated that the cost-of-living adjustment would increase by “0.2 percentage points per year on average” as a result.

According to the Bureau of Labor Statistics, the CPI-E is a statistic which weighs inflation to account for the spending patterns of those aged 62 and older, such as their higher proportional spending on health care. The Bureau warned that this statistic has certain limitations, such as a smaller sample population, and currently has no official usage.

According to a factsheet for the bill, it would also increase the Special Minimum Benefit to 125% of the poverty line, “or over $18,000 for a single worker who had worked their full career.”

The bill would also increase the first income-percentage “bend point” from 90% to 95%. This means that, going forward, 95% of the first $1,115 in monthly wages (for 2023, indexed to inflation) would count toward Social Security benefits, up from 90%. This has the effect of frontloading benefit increases such that low-income workers benefit proportionally more from them.

Sanders’ office estimates that the annual Social Security benefit would increase on average by $2,400 a year.

The Senators propose the bill shortly after President Joe Biden was called a “liar” by Republicans during this State of the Union address for saying they were threatening to cut Social Security and Medicare to reduce the national debt. The risk of future retirees seeing reduced Social Security payments due to lack of funding has been a policy topic for years, with the Congressional Budget Office warning last December that the trust fund payments may be depleted by 2033, resulting in a 23% cut in planned benefit payments in 2034.

Data and Research February 17, 2023

Worldwide Pension Assets Fell in 2022, to Lowest Level in 15 Years

The decline for pension assets was the largest since the financial crisis of 2008, new data shows.  

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The post-mortems of 2022’s investing record continue to arrive. The latest finds that pension assets worldwide plummeted 16.7% last year.

That dour finding, from a study by WTW’s Thinking Ahead Institute, marks a reversal from a decade-long sequence of uninterrupted expansion and is the worst fall since 2008, at the onset of a global financial crisis. The world’s pension funds ended last year with $47.9 trillion in assets, the study found.

Of course, the epic drop is the result of sudden, high inflation, escalating interest rates, geopolitical tensions and recession fears. All this downbeat news had an impact felt in pension programs in what WTW calls the P22, the world’s largest pension markets.

The U.S. continues to be the largest pension market, followed at a significant distance by Japan and Canada, the research showed. Those three markets constitute more than 76% of pension assets in the  P22 nations. The U.K. fell back to fourth place, from third. WTW attributed that to losses amid the forced selling of UK government bonds amid a financial smash-up last year.

“Last year we experienced, to an extent, a global ‘polycrisis’ where various risks combined, were amplified as a result, and manifested in significant asset fall,” said Marisa Hall, head of the Thinking Ahead Institute, in a statement. “It is our view that these systemic risks will increase in the future and will emanate predominantly from environmental, societal and geopolitical sources.”

Since 2002, stock allocations among the P22 have decreased to 42% from 50%, and bonds’ portion has dipped to 32% from 38%. Meanwhile, alternatives, such as real estate, swelled to 22%, up from 9% in 2002. The study noted that “traditionally the U.S. and Australia have had higher allocations to equities than the rest of the largest seven pensions markets (P7), while Japan, Netherlands and the UK have had higher allocations to bonds.”

In many places, defined benefit pensions continued to diminish as pension sponsors moved into defined contribution plans. In the past 20 years, WTW reported, global DC assets have grown 7.2% yearly, compared with a 4.4% for DB assets.

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