Whether you're new to the workforce or have been retired for years, the chances are good that you'll rely on Social Security income, to some varied degree, to make ends meet during your golden years.
Earlier this year, national pollster Gallup found that 89% of retirees are currently leaning on Social Security as a "major" or "minor" source of income. Meanwhile, 84% of non-retirees anticipate needing their retired worker benefit to help pay bills when they hang up their work coats for good. In other words, Social Security is vital to the financial well-being of most Americans.
Unfortunately, this pivotal program is on shaky ground.
Image source: Getty Images.
Social Security is facing a greater than $20 trillion long-term cash shortfall
Social Security is in absolutely no danger of going bankrupt or becoming insolvent. If you've earned the requisite 40 lifetime work credits to receive a retired worker benefit, you'll be netting a monthly payment when you're eligible. Since Social Security is primarily funded by the payroll tax on earned income, it can't go bankrupt as long as people continue to work and pay their taxes.
However, the most recent Social Security Board of Trustees report implies that sizable benefit reductions aren't too far off if deficiencies with the program aren't dealt with.
For example, the Trustees report highlighted a combined funding shortfall in the Old-Age and Survivors Insurance Trust (OASI) and Disability Insurance Trust (DI) of $20.4 trillion over the next 75 years. This shortfall is due to a laundry list of factors, including boomers retiring, increased longevity, lower legal immigration, historically low U.S. birth rates, and an abundance of other macroeconomic shifts.
If lawmakers were to fail to address these issues, the report predicts that an up to 23% reduction in monthly benefits would become necessary for the OASI by 2034 to sustain payouts through 2096 without any additional cuts. The OASI is responsible for doling out benefit checks to 47.9 million retired workers each month.
And this isn't the only issue. Since 2000, the purchasing power of Social Security income has declined by a jaw-dropping 40%, according to an analysis by nonpartisan senior advocacy group, The Senior Citizens League. The problem is that Social Security's annual cost-of-living adjustment (COLA), and ultimately the inflationary tether that dictates how much benefits should rise in the upcoming year, does a poor job of accounting for the inflation senior citizens are contending with.
Joe Biden listening to former President Barack Obama while in a meeting. Image source: Official White House Photo by Pete Souza.
Revisiting the four changes Joe Biden wants to make to Social Security
Social Security desperately needs attention by lawmakers, and this was a pledge President Joe Biden made during his campaign before winning the presidency. Prior to taking office, Biden laid out four changes he wanted to see made to Social Security that would generate additional revenue and funnel larger payments to those who needed them most.
1. Increase payroll taxation on the well-to-do
Arguably the most popular change proposed by now-President Joe Biden is having the well-to-do pay more into the system.
In 2022, all earned income (wages and salary but not investment income) between $0.01 and $147,000 is subject to the 12.4% payroll tax. Approximately 94% of working Americans are paying this tax on every dollar they earn. But for high earners, wages and salary above $147,000 are exempted from the payroll tax. We're talking about well over $1 trillion in earned income avoiding the payroll tax each year.
Biden's plan is simple: Create a doughnut hole between the current payroll tax cap ($147,000) and $400,000 where earned income would remain exempt. For wages and salary above $400,000, the 12.4% payroll tax would kick in again. This should allow Social Security to collect extra revenue each year. Plus, with the payroll tax cap increasing most years, this doughnut hole should eventually close over time.
2. Boost benefits for long-lived beneficiaries
The second change Biden proposed was increasing the primary insurance amount (PIA) doled out to aged beneficiaries. The reason for this change is that, as people age, some of their expenses, such as medical transportation costs, can rise a lot faster than the COLA attached to their Social Security benefit.
Biden outlined a plan to increase the PIA by 1% annually from ages 78 through 82 until aged beneficiaries receive a cumulative 5% bump.
3. Lift the special minimum benefit
A third Social Security change offered by Biden during his campaign was to enhance the special minimum benefit.
In 2022, a lifetime low-earner with 30 years of coverage could receive a monthly benefit of almost $951. The issue is this isn't anywhere close to the federal poverty level (for one individual) of $1,132.50/month, as of 2022.
Biden's proposal suggests increasing Social Security's special minimum benefit to 125% of the federal poverty level. Instead of $951, a lifetime low-earning worker with 30 years of coverage could be receiving nearly $1,416 per month under Biden's plan in 2022.
4. Change the inflationary tether from the CPI-W to the CPI-E
The fourth and final Social Security change Joe Biden wants to make is to switch the program from its ineffective inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), to the Consumer Price Index for the Elderly (CPI-E).
As noted, the CPI-W has done a poor job of accounting for the inflation seniors are facing, which has resulted in a 40% loss of purchasing power this century. Since the vast majority of Social Security recipients are seniors, utilizing an index that solely focuses on the expenditures important to aged Americans (i.e., the CPI-E) should lead to more accurate COLAs on an annual basis.
Joe Biden's Social Security proposals have little chance of becoming law
President Biden unveiled his Social Security proposals more than two years ago. Despite having his party narrowly take control of Congress, no progress has been made tackling the numerous issues that are plaguing Social Security or advancing Biden's approach.
The biggest hurdle facing Congress when it comes to "fixing" Social Security is that finding a middle ground has been virtually impossible. For example, even though Democrats and Republicans agree the CPI-W is doing a poor job of accounting for the inflation that senior citizens are facing, both parties have approached their solutions from opposite ends of the spectrum. Since both proposals would get the job done, neither party feels the need to cede an inch and find a common-ground fix with their opposition.
If there is a silver lining here, it's that lawmakers have a habit of coming to Social Security's aid during the 11th hour. In 1983, with the program less than a year away from exhausting its asset reserves (i.e., the excess revenue built up since inception), President Ronald Reagan and Congress passed a bipartisan overhaul of Social Security. The Amendments of 1983 included core proposals from both political parties.
The other issue President Biden would have to contend with is getting the requisite 60 votes needed in the U.S. Senate to pass any reforms to Social Security. Even if the Senate were controlled by Democrats, passing Biden's Social Security agenda would likely require some Republican support. It's been more than four decades since either party held a supermajority (60 votes or higher) in the U.S. Senate.
For the time being, the blunt reality is President Biden's Social Security proposals, and all other proposals from both parties, for that matter, aren't gaining any traction in Congress.
