It's been a wild November and a challenging year for all of America. Amid the unprecedented coronavirus disease 2019 (COVID-19) pandemic, which brought about the worst recession we've seen in decades, Americans decided on the path our country will take moving forward. Following a hard-fought election, former vice president and Democratic Party challenger Joe Biden is set to become our nation's 46th president on Jan. 20, 2021.
Though Biden will have to tackle a number of challenges in his four years in the Oval Office, none may be more daunting than fixing Social Security.
Social Security has a $16.8 trillion problem
For more than 80 years, Social Security has, without fail, made guaranteed payments to eligible retired workers. Today, almost 65 million people are receiving a monthly benefit, 46 million of whom are retirees.
The problem is, Social Security isn't in great financial shape. The latest Social Security Board of Trustees report has projected that the program will expend more than it collects in 2021. If accurate, this would represent the first net cash outflow for Social Security since 1982.
The bigger issue is that this isn't a one-off event. These outflows are expected to exponentially grow in size as a myriad of demographic changes take shape. By 2035, the program's $2.9 trillion in asset reserves (i.e., net cash surpluses built up since inception) are forecast to be exhausted. If these reserves are completely depleted, sweeping benefit cuts of up to 24% may be needed for retired workers to maintain program solvency through 2094. That's not an ideal scenario for a program that seniors are reliant on.
Between 2035 and 2094, the Trustees estimate that there will be a $16.8 trillion funding shortfall in the program that will need to be addressed by lawmakers.
Joe Biden brings a Social Security plan to Washington
The good news is that President-elect Biden comes to the White House with a pretty clear plan in mind to strengthen the Social Security program and make it work more effectively for low-income and aged beneficiaries. As touted on his campaign Web page, Biden's Social Security plan aims to make four key changes:
- Increase taxation on high earners: The flagship change proposed by Biden would be to collect additional payroll tax from the rich. Biden's plan would create a doughnut hole between the maximum taxable earnings cap ($142,800 in 2021) and $400,000, where earned income would be exempt from the 12.4% payroll tax. However, earned income above $400,000, which is currently exempt, would again be hit with the payroll tax. Collected additional revenue from high earners would push Social Security's potential insolvency decades down the road.
- Raise the PIA for aged beneficiaries: One of the biggest challenges facing older retirees is the higher costs associated with their medical care. To combat a cost-of-living adjustment (COLA) that often does too little for the elderly, Biden is proposing a 1% annual increase in the primary insurance amount (PIA) of aged beneficiaries between ages 78 and 82. This PIA increase would cap at 5% and lead to higher monthly benefits.
- Lift the special minimum benefit: For low-income Americans who have between 10 and 30 years of eligible work experience, Social Security pays a special minimum benefit. Unfortunately, this minimum monthly payout is well below the federal poverty line. Biden's plan would require the special minimum benefit be raised to 125% of the federal poverty line.
- Make the CPI-E Social Security's inflationary measure: The final puzzle piece of Biden's plan is to switch the program's inflationary tether from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E). The CPI-W does a poor job of accounting for the inflation that seniors are contending with since it's tracking the spending habits of working-age urban and clerical workers. Comparatively, the CPI-E measures the spending habits of households with persons aged 62 and over. Thus, utilizing the CPI-E should result in more accurate COLAs and, therefore, less loss of purchasing power.
What does a Biden presidency really mean for Social Security?
It's important to understand, however, that having a plan is very different from being able to implement that plan on Capitol Hill.
When Biden takes control of the White House, he'll almost certainly be facing a divided Congress. The House of Representatives will remain under control of Democrats, while the Senate is likely to be controlled by Republicans. That's a recipe for getting absolutely nothing done when it comes to Social Security's looming crisis.
Even if Democrats were to control the Senate, it's still far from a guarantee that Biden would have the necessary votes to enact his proposal. To amend the Social Security Act, 60 votes would be needed in the Senate. Without some sort of bipartisan support in the Senate, Biden's Social Security plan would be dead on arrival.
Another problem is that both parties believe they have the superior solution. Biden's proposal to increase payroll taxes on the wealthy is the core idea to strengthen Social Security from the Democratic Party. Meanwhile, Republicans favor a gradual increase to the full retirement age, which would reduce program outlays over time. Since both ideas would achieve their objective, neither party sees any value in finding common ground with their opposition.
There's also Social Security's grim reality: All fixes mean some group(s) lose out. If, for example, Biden were to get his plan enacted, we'd see the wealthy pay much more into the system without receiving a penny in extra benefits come retirement. Comparatively, the GOP's plan would result in future generations of working Americans (e.g., millennials and Generation Z) receiving lower lifetime benefits from the program. In other words, the party that chooses to fix Social Security could risk alienating voters, which might cost seats in the next election.
What does a Biden presidency really mean for Social Security? Chances are that nothing will change.