Social Security has been around since 1935. Like most 87-year-olds, it has changed in some ways throughout the years.
You can pretty much bank on the federal program transforming even more in the not-too-distant future. Here are the three biggest Social Security changes that are likely on the way.
1. Increased payroll tax cap
Social Security is projected to become insolvent by 2034 if nothing is done to bolster the program financially. That's the bad news. The good news is that there's a change that would go a long way toward preserving full Social Security benefits.
Currently, the maximum income subject to payroll taxes that fund Social Security is $147,000. President Joe Biden also wants to tax all income above $400,000. This change would create a "doughnut hole" with income between $147,000 and $400,000 not being taxed. However, that hole would likely disappear over time as the lower payroll-tax threshold is raised.
Increasing the payroll-tax cap is the Social Security change that Biden wants that's most likely to happen. It would offset around 61% of the projected shortfall for the program, according to the University of Maryland's Program for Public Consultation (PPC).
Importantly, this idea enjoys broad bipartisan support among Americans. PPC conducted a survey in June that found that 79% of Republicans and 88% of Democrats favor increasing the payroll tax cap to $400,000.
2. Changing the way COLAs are calculated
Biden also proposed during his presidential campaign in 2020 a change to the way Social Security cost-of-living adjustments (COLAs) are calculated. In particular, he'd like to replace the inflation metric used to determine Social Security increases.
Since automatic annual COLAs were introduced in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been used to calculate the benefits adjustment. Biden wants to swap out the CPI-W with the Consumer Price Index for the Elderly (CPI-E).
The CPI-E focuses on price changes impacting Americans ages 62 and older. It gives a heavier weighting to healthcare costs than the CPI-W does. As a result, replacing the CPI-W with the CPI-E could result in higher COLAs for Social Security recipients.
There's a downside to this idea, though. The PPC estimates that using the CPI-E to calculate COLAs could increase the projected funding shortfall for Social Security by 12%.
3. Raising the retirement age
Raising the full retirement age for Social Security wasn't included in Biden's 2020 plan. However, the change seems likely to happen for several key reasons.
First, a gradual increase in the full retirement age from 67 to 68 would eliminate 14% of the projected Social Security shortfall, based on PPC's analysis. Combined with an increase to the payroll tax cap, this proposal would make a big impact on preserving Social Security benefits.
Second, the change is relatively popular. The PPC's June survey found that 75% of Americans endorsed gradually raising the retirement age to 68. This support is also bipartisan, with 75% of Republicans and 76% of Democrats favoring the proposal.
Third, this isn't a new idea. Social Security's full retirement age initially was 65. This age was raised as part of legislation passed in 1983 to bolster the program.
When might these three Social Security changes happen? It will definitely be after 2023, at the earliest.
Some legislation has been introduced to Congress that includes increasing the Social Security payroll-tax cap and replacing the CPI-W with the CPI-E. However, the chances of these bills passing at this point appear to be low. Even if these Social Security reforms were enacted, they wouldn't go into effect until 2023 or later.
President Biden hasn't pushed for the Social Security plan that was part of his campaign yet. It's possible, though, that he could do so in the second half of his term.
The aforementioned changes might not even happen during Biden's presidency. However, with the clock ticking until Social Security reaches insolvency, the pressure will increase for something to be done. It's reasonable to expect some sweeteners (such as the COLA calculation change) to be included in any deal to firm up Social Security financially.