Since 1985, the annually released report from the Social Security Board of Trustees has cautioned that America's most important social program was in trouble. Namely, Social Security's long-term revenue (defined as the 75 years following the release of a report) would be insufficient to cover its growing outlays.
The silver lining among this worrisome tale is that Social Security, thanks to its two recurring sources of revenue, is incapable of insolvency. However, a number of ongoing demographic changes do suggest that benefit cuts of up to 23% may be imposed on then-current and future generations of retired workers by 2035 in order to keep payouts flowing from the Social Security program.
With Social Security facing up to a $13.9 trillion shortfall between 2035 and 2093, Americans are looking to their elected officials to fix this mess. Ultimately, it'll fall on the president of the United States to work with Congress to pass legislation that strengthens Social Security. The only question is, who will that president be?
In the early stages of the 2020 election season, Sen. Bernie Sanders (I-Vt.) has emerged as a leading candidate for the Democratic Party ticket. Here, we'll take a closer look at how Sanders envisions Social Security's purpose, as well as how he'd tackle its existing shortcomings.
Sanders seeks changes that protect low-income and disabled workers
If there's one thing to note about Sanders' views on Social Security, it's that they haven't changed much over time. While freely admitting that the program needs solutions to strengthen it and enhance benefits, Sanders rightly understands that Social Security isn't going bankrupt -- it just needs a helping hand. That's in stark contrast to surveys of the American public where quite a few pollees believe Social Security won't be around when they retire, which, thankfully, is an incorrect narrative.
Sanders' vision for Social Security is simple: He wants benefits expanded for all eligible recipients. To be clear, though, Sanders' discussions of remedying the program's cash shortfall have primarily involved increasing monthly benefits for low-income workers and the disabled in order to lower poverty rates for both groups. As Sanders said in his 2016 book, Our Revolution:
Social Security is the most successful government program in our nation's history. Before Social Security was signed into law, nearly half of our senior citizens lived in poverty. Today the elderly poverty rate is 8.8% ... Social Security is not just a retirement program. It is an insurance program that protects millions of Americans who become disabled. Incredibly, the only source of income for about 3 million persons with disabilities is a Social Security Disability Insurance (SSDI) benefit that averages just $35 a day. Today, 28.5 percent of disabled Americans are living in poverty. We have got to do a lot better than that.
In fact, as you'll see a bit later, one tenet of Sanders' proposal involves boosting minimum benefits above federal poverty thresholds.
Sanders has a laundry list of solutions he won't support
Before diving into the specifics of how Bernie plans to address Social Security's long-term cash problem, let's first examine some of the proposals that he appears unwilling to compromise on. And here's a hint: If it reduces Social Security outlays in any way, it's a no-go for Sanders.
For instance, the Vermont senator vehemently opposes the idea of raising the full retirement age, or the age at which a retired worker becomes eligible to receive 100% of their monthly payout. Currently set to peak at age 67, the core proposal of the Republicans calls for a gradual increase of the full retirement age to 70. In doing so, future generations of workers would have to either wait longer to receive their full monthly payout or be forced to accept a steeper reduction to their payout if claiming early. No matter their choice, it would reduce the amount of lifetime benefits paid by the program. Sanders stands firmly against this idea.
The progressive Sanders is also no fan of the idea of privatization. Partially privatizing the program would involve setting aside a portion of a worker's payroll tax into a separate account that they could then invest as they saw fit. While the stock market has delivered some incredible returns over the years, the risks of privatization potentially outweigh the reward. What's more, privatizing does nothing to resolve Social Security's long-term cash shortfall.
While in Congress, Sanders also voted against measures designed to reduce taxation on well-to-do Americans. Back in 2000, Sanders voted against a proposal that would have eliminated the second tier of Social Security benefit taxation.
For those of you who may know, up to half of Social Security benefits may be taxable at the federal level if modified adjusted gross income (MAGI) plus one-half of benefits paid exceeds $25,000 for individuals or $32,000 for couples. Individuals and couples surpassing $34,000 and $44,000, respectively, using the same formula, are subject to taxation on up to 85% of their Social Security benefits paid. The proposal called for a uniform tax on up to half of all benefits, but Bernie voted against it.
Here's how Sanders aims to fix Social Security
Now that you have some solid background on what Sanders isn't willing to do, let's take a closer look at his game plan to strengthen America's top social program.
As noted, Sanders wants to expand benefits for all 64 million-plus beneficiaries, as well as ensure that all low-income beneficiaries are comfortably above the federal poverty level after receiving their payout. The way he'd accomplish this is by raising additional revenue.
The biggest change from existing law would be seen in the payroll tax earnings cap. In 2018, $1 trillion in revenue was collected by the Social Security Administration, of which $885 billion derived from the 12.4% payroll tax on earned income. In other words, the payroll tax is the program's workhorse. In 2020, all earned income (wages and salary but not investment income) between $0.01 and $137,700 is subject to the payroll tax, while earned income above $137,700 is exempt. Although only an estimated 6% of workers make more than this exemption level, the amount of earnings escaping the payroll tax has surged from a little over $300 billion in 1983 to $1.2 trillion by 2016.
Sanders' fix involves creating a doughnut hole between $137,700 and $250,000, where earned income within this range would remain exempt (although the lower end of this range would continue rising, over time, with the National Average Wage Index). Then, at $250,000, the 12.4% payroll tax once again kicks in, generating a boatload of new revenue for the program from the well-to-do.
Sanders' fix also involves an added tax on investment income. When the Affordable Care Act became law, so did the Net Investment Income Tax (NIIT). The NIIT applies a 3.8% surtax on net investment income for persons with MAGIs above $200,000, or $250,000 for a couple filing jointly. Sanders proposes increasing the NIIT to 10% in an effort to bolster revenue for Social Security, as well as collect tax on income that's otherwise taxed at a considerably lower, rather than standard, earnings.
Lastly, Sanders believes it's prudent to move away from the existing inflationary tether for Social Security, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), and use the Consumer Price Index for the Elderly (CPI-E) in its place. The big issue is that the CPI-W tracks the spending habits of urban and clerical workers who spend their money very differently than retired workers. Thus, when cost-of-living adjustments (COLAs) are passed along, seniors aren't receiving an increase that accurately represents the inflation they're facing. The CPI-E, which focuses solely on the spending habits of households with persons aged 62 and over, would remedy this, leading to higher annual COLAs.
Why Sanders' plan could face challenges
With the understanding of how Bernie Sanders views the program and would resolve its shortcomings, let's now, briefly, examine some of the challenges he might face implementing this plan if elected as the 46th president of the United States.
First of all, Sanders would need help from Congress, which is far from guaranteed. Although Democrats possess a majority in the House of Representatives, they're currently in the minority in the Senate. Without any form of supermajority or bipartisan support, passing amendments to Social Security in the upper house of Congress could prove challenging.
Another concern Sanders could run into is the long-term outlook for his proposal. On the bright side, Sanders' push for higher taxation on the wealthy would provide an immediate influx of revenue into Social Security, thereby extending the date the program is expected to exhaust its asset reserves by decades.
However, Sanders' unwillingness to examine any suggestions from his opposition ignores a number of other worrisome trends, such as declining birth rates, lower net-immigration levels, and rising longevity rates, which may be best dealt with by reducing long-term outlays from Social Security.
Obviously, we're still early in the election season and there are numerous issues left to be discussed. But with Sanders looking to be one of the top options for the Democratic ticket at the moment, it pays to know how he'd tackle this important issue.