In August, more than 48.1 million aged Americans collected a Social Security check. For the vast majority of these recipients -- 89%, according to an April survey from national pollster Gallup -- their Social Security income is vital to making ends meet.
This reliance on Social Security payouts is expected to carry over to future generations as well. Gallup's April poll found that 84% of nonretirees anticipate leaning on their monthly benefit as a "major" or "minor" source of income during their golden years.
Yet, despite the importance Social Security plays in the financial well-being of retirees, our nation's most successful retirement program is in deep trouble.
Based on the latest Social Security Board of Trustees report, the program is staring down a $20.4 trillion cash shortfall over the long term, which is defined as the next 75 years. What's more, the Old-Age and Survivors Trust (OASI), which is responsible for paying those aforementioned 48.1-million-plus retired workers each month, is forecast to exhaust its cash reserves (i.e., the excess cash built up since inception) by 2034. If and when the OASI's cash reserves are gone, an across-the-board cut of 23% to Social Security checks may be necessary to avoid any additional payout reductions through 2096.
Image source: Official White House Photo by Adam Schultz.
Changes need to be made to strengthen Social Security, and the American public is looking to President Joe Biden and lawmakers on Capitol Hill to make it happen.
Democrats and Republicans have approached a Social Security fix from opposite ends
The $64,000 question is: If Congress has known since 1985 that Social Security was forecast to have insufficient revenue over the long term to cover the current payout schedule, why haven't lawmakers done anything to fix it?
The answer, to put it bluntly, is political hubris from both political parties.
Democrats favor increasing payroll taxation on high-earning workers to generate more revenue for Social Security. 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. But for the 6% of workers who earn in excess of $147,000, each dollar beyond this point is exempt from the payroll tax. This allows well over $1 trillion in earnings to escape the payroll tax every year.
Meanwhile, Republicans prefer increasing the full retirement age -- the age where an eligible worker can receive their full retirement benefit. In the 82 years Social Security has been doling out a monthly benefit, the full retirement age has risen just two years (65 to 67). Comparatively, the average life expectancy in the U.S. has jumped from about 63 in 1940 to 77 as of 2020. Increasing the full retirement age would require retirees to choose between an early claim that would permanently reduce their monthly payout or waiting, which would ultimately lower the amount of benefits collected in their lifetime. In other words, it would reduce Social Security's expenses over time.
Both foundational solutions work to strengthen Social Security, which means neither party is incentivized to find common ground with their opposition. Thus, the stalemate we have today.
This Joe Biden quote leaves the door open for sweeping Social Security changes
However, it's also worth noting that neither individual solution resolves Social Security's long-term funding shortfall.
Increasing the payroll tax on high earners does provide an immediate boost to revenue collection and has the potential to extend the OASI's solvency by years or a couple of decades, depending on the source of the analysis. But simply increasing taxes on the rich doesn't provide enough forecast revenue to come anywhere near closing the projected $20.4 trillion cash shortfall through 2096.
Likewise, the GOP's plan to raise the full retirement age has a flaw. Although it would help reduce program outlays, raising the retirement age would take decades to have an effect. This does nothing to help the OASI avoid the possible exhaustion of its asset reserves and a 23% cut to Social Security checks by 2034.
But President Biden may have a different solution in mind that could completely change Social Security and solidify its foundation.
In 2007, when then-Senator Biden was running as a presidential candidate for the 2008 ticket, he was asked a straightforward question on America's "third rail" by host Tim Russert on Meet the Press. Said Russert: "Senator, we have a deficit, we have Social Security and Medicare looming. Would you consider looking at those programs, age of eligibility, cost of living, put it all on the table?"
Biden's eventual 10-word response to Russert was, "You've got to put all of it on the table."
What this response implies is a willingness to break with strict party views and open the discussion to compromise. Although neither party's solution resolves Social Security's long-term funding shortfall by itself, a bipartisan proposal could do just that.
Keep in mind that Joe Biden played a role in Social Security's last major overhaul, which occurred in 1983 under President Ronald Reagan. This bipartisan piece of legislation that gradually increased the payroll tax and full retirement age over time, as well as introduced the taxation of Social Security benefits above select income thresholds, was supported by 88 senators, including Biden.
Image source: Getty Images.
Is President Biden still open to a bipartisan solution?
Of course, a lot has changed in the 15 years since Biden was willing to "put it all on the table." Senator Biden is now President Biden, and his views on Social Security have evolved a bit.
While on the campaign trail prior to winning the 2020 election, Biden released a four-point plan to strengthen Social Security:
- Increase payroll taxation on high earners: As noted, all earned income between $0.01 and $147,000 is subject to the payroll tax. Biden's plan creates a doughnut hole that exempts earned income between the maximum taxable earnings cap ($147,000) and $400,000 while reinstating the payroll tax on earned income above $400,000.
- Increased benefits for long-lived recipients: Expenses for aged beneficiaries tend to rise later in life. Biden proposed a 1% annual increase to the primary insurance amount (PIA) from ages 78 through 82. Ultimately, this 5% cumulative increase to the PIA would lift benefits for elderly recipients.
- Boost the special minimum benefit: In 2022, a lifetime low-earner with 30 years of coverage brings home $951 per month, which is well below the federal poverty level. Biden's proposal would increase the special minimum benefit to 125% of the federal poverty level.
- Switch Social Security's inflationary tether to the CPI-E from CPI-W: Lastly, Biden's plan utilizes the Consumer Price Index for the Elderly (CPI-E) as its inflationary measure, rather than the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W has done a poor job of tracking the inflation that the program's retirees are contending with.
As you'll note, no aspect of Joe Biden's latest Social Security proposal mentions raising the full retirement age.
Without a supermajority of 60 seats in the Senate, the only way to resolve Social Security's funding shortfall is with votes from the opposition. Although Senator Biden has been part of major bipartisan legislation concerning Social Security before, it's not clear if he's open to the idea of "putting it all on the table" as President.
While Biden's candor in his 2007 interview offers hope that real changes are a possibility, it seems likelier that the Capitol Hill stalemate will persist.
