This has been a monumental month amid an unprecedented year for the United States. While navigating our way through the coronavirus disease 2019 (COVID-19) pandemic and the steepest recession in decades, we watched initial COVID-19 vaccine efficacy data from Pfizer and BioNTech blow researchers' expectations out of the water. We also elected a new president, with Democratic Party challenger Joe Biden handily defeating incumbent Republican Donald Trump.
President-elect Biden has a number of issues he'll need to tackle head-on when he's inaugurated on Jan. 20, including the federal response to the coronavirus pandemic and the ongoing economic recovery. But that's not all the former vice president will have to contend with. America's top social program, Social Security, is also set to make dubious history with Biden in the White House.
Social Security's judgment day will occur in Biden's first year
Every year since 1940, which is when retired worker payouts began, the Social Security Board of Trustees has released a report detailing the short-term (10-year) and long-term (75-year) outlook for the program. Since 1985, the Trustees have cautioned that there wouldn't be enough revenue collected to support the existing payout schedule over the long run. Though Social Security won't be going bankrupt, it's facing a $16.8 trillion funding shortfall through 2094.
For decades, Social Security's problems have been swept under the proverbial rug or kicked down the road for the next elected candidate to deal with. For President-elect Biden, that's not going to be an option. You see, the Trustees have forecast that 2021 will be the first year when Social Security expends more than it collects in almost four decades. This unwanted milestone is truly just the tip of the iceberg.
According to the Trustees' intermediate-cost model projection (the intermediate-cost model is simply the model the Trustees view as most likely to happen), the program is estimated to outlay $21.1 billion more than it brings in for 2021. This net cash outflow will more than double to $42.9 billion in 2022. In 2028, the program is expected to burn through $241.7 billion in a single year and close to $1.1 trillion in asset reserves between 2021 and 2028.
If Social Security's $2.9 trillion in asset reserves (annual surpluses built up since inception) were to be exhausted, the Trustees estimate a 24% cut to retired-worker benefits would be needed to sustain payouts through 2094.
Why Social Security is in big trouble
How does the most important social program in our country find itself in such a mess? The answer boils down to a number of ongoing demographic changes that are adversely affecting Social Security.
While you might be familiar with the finger-pointing at baby boomers for retiring from the workforce, you've probably overlooked other serious issues hampering the program. For instance, widening income inequality is hurting Social Security. Since the wealthy have little or no financial constraints when it comes to receiving medical care or prescription medicine, they're handily outliving lower-income folks who Social Security was designed to protect. Not only are the rich living substantially longer, but they're also pocketing a larger monthly benefit.
To somewhat stray from this point, increased longevity has been troublesome, as well. Between 1940 and 2022, the full retirement age will climb by only two years (from 65 to 67). Meanwhile, the average life expectancy at birth has risen by approximately 16 years over the past eight decades. Social Security wasn't designed to divvy out benefits for two-plus decades, and it's clearly straining the program.
Some of the blame can also be assigned to record-low birth rates. Social Security counts on a steady number of births to ensure that future generations of retirees will be replaced in the labor force. However, current birth rates are below this replacement level and could put serious pressure on the worker-to-beneficiary ratio in the years to come.
Even immigration is to blame. The Social Security program counts on a steady influx of legal migrants into the U.S. each year. Immigrants coming to the U.S. tend to be younger, and therefore spend decades in the workforce contributing via the payroll tax. Over the past two decades, we've witnessed a near-halving in legal annual migration into the U.S., which is a serious concern.
Biden has a plan but not the platform
When Joe Biden is officially handed the keys in less than two months, he'll have a plan to strengthen the Social Security program. While campaigning, Biden laid out his four-step proposal:
- Increase payroll taxation on high earners
- Boost the special minimum benefit
- Give aged beneficiaries a raise
- Switch the program's inflationary tether to the Consumer Price Index for the Elderly
While all of these measures are designed to improve the financial well-being of retired workers, the proposal to increase payroll taxation on the top 1% of earners is the key to success.
When Biden takes office in 2021, the 12.4% payroll tax will be applicable to earned income between $0.01 and $142,800. All wages and salary above this maximum taxable cap is exempt from the payroll tax. Between 1983 and 2016, the amount of earnings exempted from tax practically quadrupled to $1.2 trillion.
Biden's proposal would create a doughnut hole between the maximum taxable cap and $400,000, where earned income would remain exempt. But above $400,000, the 12.4% payroll would kick back in. The extra revenue raised from such a move would sustain Social Security for decades.
However, having a plan is only half the battle. There's the very real possibility that Biden will be facing a split Congress, with Democrats holding onto the House of Representatives and Republicans controlling the Senate. To amend the Social Security Act, 60 votes are needed in the Senate. That's simply not going to happen with the GOP in charge of the upper house of Congress.