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Everything Wrong With Bernie Sanders' Social Security Plan

By Sean Williams - Feb 28, 2020 at 6:06AM

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Sanders' ambitious overhaul of Social Security offers intrigue, but it overlooks a number of ongoing demographic changes.

There's no beating around the bush anymore: Social Security is in trouble.

According to the 2019 report from the Social Security Board of Trustees, the program is expected to experience its first net cash outflow this year since 1982. This comes after Social Security's net cash surpluses in 2018 and 2019 were the lowest since the program was last overhauled in 1983. If things continue as the Trustees have forecast, the program will exhaust its $2.9 trillion in asset reserves by 2035.

If there's a silver lining here for seniors, it's that Social Security can't going bankrupt, even if it doesn't have a dime in asset reserves. But that's still little solace for Americans who are, or will be, reliant on Social Security income to make ends meet. These current and future retired workers could see their benefit cut by up to 23% within the next 15 years.

It's for this reason that working Americans and retirees are looking to Washington to fix this problem -- and it all starts at the top, with the president.

Senator Bernie Sanders giving remarks in front of the Capitol building.

Sen. Bernie Sanders giving remarks in front of the Capitol building. Image source: Bernie Sanders' Senate webpage.

Here's how Bernie Sanders plans to tackle Social Security's cash shortfall

While there's still much to be decided on the Democratic Party ticket, Vermont Sen. Bernie Sanders, an independent, is the current front-runner for the nomination. He also happens to be one of the few Democrats to have fully detailed his plan to fix Social Security. Though there are more than a half-dozen changes Sanders has proposed to the program, there are a few shifts that stand out.

  • Implements a doughnut-hole tax on earned income above $250,000: Perhaps the biggest change of all would come to the program's workhorse, the 12.4% payroll tax on earned income. Right now, all earned income between $0.01 and $137,700 is subject to the payroll tax, with wages and salary north of $137,700 exempt. Since 1983, the amount of earnings exempted annually has practically quadrupled to $1.2 trillion. Sanders proposes a doughnut hole between $137,700 and $250,000 where earned income would remain exempt, but reinstitutes the payroll tax on every earned dollar above $250,000, with no upper limit.
  • Increases the Net Investment Income Tax to 10%: As you may have caught from the mention of "earned income," investment income is exempt from the payroll tax. Long-term capital gains are also taxed at a much lower rate than standard earnings. Under Bernie's proposal, the Net Investment Income Tax (NIIT) would increase from the 3.8% rate established by the Affordable Care Act for individuals and couples with modified adjusted gross income (MAGI) above $200,000 and $250,000, respectively, to a 10% tax on investment income.
  • Adjusts the inflationary tether to the CPI-E from CPI-W: Sanders also wants to see Social Security ditch the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in favor of the Consumer Price Index for the Elderly (CPI-E). The CPI-W has never done a particularly good job of accounting for the true inflation that seniors are contending with, leading to inadequate cost-of-living adjustments (COLA). In Sanders' view, the CPI-E would do a better job by only accounting for the spending of seniors aged 62 and over, which makes sense given that more than 80% of program recipients are senior citizens.
  • Implements a monthly minimum benefit for low-income retirees: Lastly, Sanders' Social Security plan calls for an expansion of benefits for all retired workers, but especially those who are low income or disabled. The Vermont senator proposes implementing a minimum benefit that results in an annual payout that's higher than the federal poverty level.
Two Social security cards lying atop a W2 tax form that shows payroll tax paid.

Image source: Getty Images.

Everything wrong with Bernie Sanders' Social Security proposal

On the surface, there are a lot of really intriguing ideas here that, according to Sanders, would extend the life of Social Security's asset reserves another five decades. The Democratic front-runner's plan would result in an immediate boost in payroll tax collection, and retirees should see more accurate COLAs over the long run with the CPI-E as the program's inflationary tether.

But Sanders' Social Security plan is far from perfect. Like Donald Trump's Social Security plan, it's filled with flaws. Here are some of the most notable issues that could derail Bernie's vision to strengthen the program.

First of all, Sanders might be overestimating how much additional revenue would be brought in by making changes to the payroll tax earnings cap. While there's no doubt that reinstating the payroll tax on earned income above $250,000 is going to lead to more revenue for Social Security, it fails to account for the response of the well-to-do, who are likely to adjust their income streams to lessen or avoid added taxation. Although the increase in the NIIT is designed to help counteract some of these perfectly legal loopholes, it would not be surprising if higher-income individuals and couples targeted investment income and kept their MAGI's below the threshold where the NIIT comes into pay.

While the use of the CPI-E sounds like a great idea, it's also not a perfect inflationary measure. A report from the Government Accountability Office notes that the CPI-E is considered to be an experimental inflationary measure by the Bureau of Labor Statistics. This means additional refinement would be needed to make the CPI-E suitable for use as Social Security's inflationary tether.

What's more, even the CPI-E fails to account for all aspects of inflation seniors are contending with. Despite a majority of program recipients being enrolled in Medicare, the CPI-E excludes a number of expenses tied to this crucial social program. This can result in medical care expensing and inflation being understated, and still lead to inadequate COLAs.

A concerned senior man staring out a window.

Image source: Getty Images.

But the biggest issue with Sanders' Social Security plan might be that it completely ignores a number of demographic shifts that could throw his solvency projections out the window. In particular, the program has seen a marked increase in longevity over the 80 years payouts have been made, yet the full retirement age will have risen by a mere two years between 1940 and 2022. This has allowed more and more seniors to receive a Social Security payout for two (or more) decades, and is a clear reason the program is currently strained.

Other issues that Sanders' plan appears to have glossed over include a pretty hefty decline in net immigration rates into the U.S. over the past two decades and record-low birth rates among women of childbearing age. All of these factors could adversely impact the worker-to-beneficiary ratio over the long run, which would significantly increase the amount of money needed to resolve Social Security's estimated cash shortfall over the next 75 years.

Don't get me wrong, I believe bits and pieces of Sanders' Social Security plan are exactly what the program needs. But without a bipartisan proposal that takes into account ideas from both sides of the political aisle, Social Security as a program will continue to struggle.

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