In case you haven't heard, our nation's most important social program is less than 16 years away from very big trouble.
According to the latest annual report from the Social Security Board of Trustees, the 84-year-old program is set to do something next year that it hasn't done since 1982: spend more money than it collects in a given year. A multitude of ongoing demographic changes are weighing on Social Security, and by next year, it'll switch from generating net-cash surpluses to net-cash outflows. With each and every year, these outflows are projected to grow in size, leading to the eventual depletion of nearly $2.9 trillion in asset reserves by 2035.
The good news is that current and future beneficiaries don't have to worry about insolvency with Social Security because that's not in the cards. But a benefit cut of up to 23% for retired workers by 2035 is a very real possibility if Congress doesn't get off its laurels and resolve the program's estimated $13.9 trillion cash shortfall over the next 75 years.
Of course, one individual believes they have the solution that'll right Social Security's slowly sinking ship: Massachusetts Senator and Democratic presidential candidate Elizabeth Warren.
Elizabeth Warren's Social Security fix, in a nutshell
A little more than two weeks ago, Warren unveiled her plan to bolster Social Security, which would involve expanding benefits for everyone, as well as raising additional revenue through taxation.
For starters, Warren aims to increase all beneficiary payouts -- that's more than 63 million people -- by $200 a month, or $2,400 a year. She would also update a number of rules pertaining to lower-income families, people with disabilities, public-sector workers, and people of color. More specifically, minimum monthly benefits would be set at 125% of the federal poverty level, with public-sector workers avoiding adjustments from the Windfall Elimination Provision and the Government Pension Offset.
Furthermore, Warren proposes that the program's inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), be replaced by the Consumer Price Index for the Elderly (CPI-E). Since 2000, seniors have lost 33% of their Social Security income purchasing power due to the fact that the CPI-W measures the spending habits of traditionally working-age urban and clerical workers.
The CPI-E would allow Social Security's inflationary tether to measure the spending habits of households with seniors aged 62 and over, thereby adding more weight to housing and medical-care expenditures. This change would make a difference since retired workers make up 70% of all beneficiaries. By making this switch, the CPI-E should lead to larger annual cost-of-living adjustments.
To raise revenue for these changes, Warren has proposed an aggregate payroll tax rate of 14.8% that would apply to wages and salaries above $250,000. Currently, the aggregate payroll tax is 12.4% on earned income between $0.01 and $132,900, with any wages and salary above this level exempted from the payroll tax. Thus, Warren's plan creates a temporary moratorium between the current payroll tax cap and $250,000, with the higher rate being implemented at $250,000 and above. Note: This higher rate applies to the self-employed, with employees of a company splitting this higher payroll tax rate (7.4% apiece) with their employers.
Warren also proposes increasing the net investment income tax on individuals and families earning more than $250,000 and $400,000, respectively, from a current 2.9% to 14.8%. This would require well-to-do workers or families to contribute 14.8% of the lesser of net investment income or total income above these thresholds.
According to Warren, not only would this plan lift 5 million seniors out of poverty but would extend the solvency of Social Security by 19 years. Plus, taxing the rich is the single-most-favored means of saving Social Security, according to various polls.
Here's why Warren's plan won't meet its touted goals
It sounds great on paper, but there are seven notable flaws with Warren's Social Security proposal.
1. She almost certainly won't have the votes to pass it
Let's start with the obvious: Warren would need 60 votes to pass her Social Security plan in the Senate, and she's almost certainly not going to get it without bipartisan cooperation. Republicans have long believed that reducing expenditures, not increasing taxation, is the preferred method of resolving Social Security's cash shortfall. Unless Democrats were to pick up 10 seats or more in the Senate, there's virtually no chance of passage in the upper house of Congress.
2. The rich are already paying their fair share
Though it's a highly contentious point, it could be argued that the rich are already paying their fair share. The reason the payroll tax cap exists is because Social Security also caps how much can be paid on a monthly basis at full retirement age ($2,861 in 2019).
It makes little sense to tax $10 million in earned income if the most a beneficiary could net is $2,861 a month during retirement. Despite being a popular solution among the public, raising the payroll tax on the top 2% isn't as logically cut and dried as you'd think.
3. The well-to-do will find ways to shift their income
Thirdly, don't discount the possibility that the well-to-do will find ways to shift how they earn money. You see, Social Security's payroll tax is applicable to earned income, such as wages and salary. It's not applicable to investment income, such as capital gains on stocks or the interest earned on municipal bonds. Even if Warren were able to close a number of loopholes described in her Social Security proposal, nothing would prevent the well-to-do from shifting how they earn money to avoid a higher payroll tax or the net investment income tax.
4. The CPI-E is far from a perfect COLA fix
Although the CPI-E would do a far better job of measuring the inflation that seniors are facing than the CPI-W, it isn't perfect. The Index is considered experimental by the U.S. Bureau of Labor Statistics, and it would require quite the bit of refining before being used as a permanent cost-of-living adjustment (COLA) tether.
Also, the CPI-E fails to take into account certain costs that can account for a significant chunk of a senior's medical spending. Therefore, even with the CPI-E, we'd still likely see Social Security dollars lose purchasing power over time, but at a slower pace than we're seeing now.
5. It doesn't account for increased longevity
In case you haven't noticed, the average life expectancy of Americans has increased at a pretty steady pace for decades, with the exception of the past three years. Since Social Security was signed into law in 1935, the average life expectancy has grown more than a decade.
At the same time, the full retirement age will have increased by a meager two years between 1935 and 2022 to age 67 from 65. If beneficiaries continue to live longer and are able to draw payouts for decades, it could place a growing strain on the program. Warren's plan doesn't address this.
6. It fails to take into account falling birth rates
Another factor Warren fails to address with her proposal is the possibility of lower birth rates impacting her projections. For nearly a decade, U.S. birth rates have been on the decline, which ultimately threatens to push the worker-to-beneficiary ratio even lower.
According to the Centers for Disease Control and Prevention, the U.S. fertility rate hit an all-time low in 2018 for women aged 15 to 44. If this trend continues, the program's cash shortfall will be larger than expected.
7. It ostracizes key campaign contributors
Lastly, Warren's proposal, which directly goes after well-to-do workers, families, and the companies that employ these folks, could result in wealthy campaign donors looking to place their support behind other politicians. It's no secret that wealthy individuals and corporations may use their wallets to influence Capitol Hill's agenda, and a direct hit to their wallets by Warren's Social Security proposal isn't likely to be received well by these folks and businesses.
Don't get me wrong, Warren's Social Security proposal offers a number of intriguing ideas. But the fact remains that a bipartisan approach, which includes tax hikes and long-term cost reductions, will be needed to strengthen our nation's top social program.