In September, 65.8 million people received a Social Security benefit, including more than 48 million retired workers. The vast majority of these retirees -- 89%, to be exact -- need their Social Security income to some varied degree to make ends meet.
But after more than eight decades of successfully pulling seniors out of poverty, what can arguably be regarded as America's most successful retirement program finds itself in big trouble.
President Biden delivering remarks. Image source: Official White House Photo by Adam Schultz.
America's top retirement program has a $20 trillion cash shortfall
Every year since 1940 -- the year when retired worker benefits began -- the Social Security Board of Trustees has issued a report that provides a thorough examination of the program's financial state. This 200-plus-page report takes numerous variables into account, including new legislation, economic growth, and a variety of demographic changes, to effectively determine how solid the foundation is beneath this program. The latest report, along with the 36 previous reports before it, signaled trouble.
Since 1985, the Trustees Report has highlighted a projected shortfall in revenue collection to sustain existing payout levels, including annual cost-of-living adjustments (COLAs), over the coming 75 years (what the Trustees define as the "long term"). The 2022 report estimates a $20.4 trillion long-term cash shortfall through 2096.
The silver lining of this data is that Social Security is in no danger of insolvency. Since 90% of the program's revenue comes from the 12.4% payroll tax on earned income, money will continue to be collected as long as Americans keep working.
The bad news is that existing payout levels won't be sustainable for much longer unless lawmakers on Capitol Hill do something to strengthen Social Security. The Trustees Report estimates that the Old-Age and Survivors Trust Fund (OASI), which is responsible for retired worker and survivor benefits, will completely exhaust its asset reserves by 2034. Should this happen, an across-the-board benefit cut of 23% would become necessary for the OASI to sustain benefit payments through 2096.
Social Security has big problems; but President Joe Biden believes he has the solution.
Four big changes Joe Biden wants to make to Social Security
While on the campaign trail prior to the November 2020 election, Biden released a four-point plan that outlined the changes he feels are necessary to strengthen Social Security for decades to come. In no particular order, these changes include:
1. Making high earners pay more
This year, all earned income (wages and salaries) between $0.01 and $147,000 is subject to the 12.4% payroll tax. However, earned income above the maximum taxable earnings cap (the $147,000 level in 2022) is exempt from the payroll tax.
Biden wants to close the bulk of this loophole by making all earned income above $400,000 once again subject to the payroll tax. A doughnut hole would be created between the maximum taxable earnings cap and $400,000 where earned income would remain exempt. But thanks to annual cost-of-living adjustments and wage growth, this doughnut hole would shrink over time.
2. Switching the COLA measure to the CPI-E
For the past 47 years, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the inflationary measure used to determine COLA each year. Unfortunately, it's done a terrible job of accounting for the inflation seniors have dealt with and has cost seniors 40% of their purchasing power just since the beginning of the century.
Biden's solution is to switch out the CPI-W for the Consumer Price Index for the Elderly (CPI-E). As its name implies, the CPI-E would strictly focus on the spending habits of seniors, who make up the bulk of Social Security recipients. This should result in more accurate annual COLAs.
3. Increasing benefits for long-lived beneficiaries
One of the biggest challenges retirees deal with is growing expenses as they age. Medical care and transportation costs (e.g., medical transport) are two examples of expenditures that can increase as Americans reach their late 70s, 80s, and beyond.
President Biden has proposed increasing the primary insurance amount (PIA) by 1% annually from ages 78 through 82. Thus, an 82-year-old Social Security beneficiary would see an aggregate 5% bump to their PIA, which could be used to somewhat (or fully) offset higher expenses.
4. Boosting the special minimum benefit
This year, a worker with low lifetime earnings and 30 years of coverage can bring home a maximum Social Security benefit of $951/month. That's $181/month below the federal poverty level for a single tax filer.
Biden's fix involves adjusting the special minimum benefit to a rate of 125% of the federal poverty level. Social Security already pulls more than 16 million aged beneficiaries (65 and over) out of poverty each year. With Biden's proposal, this figure would assuredly tick higher.
Image source: Getty Images.
Will midterm elections give Biden the momentum needed to pass Social Security reforms?
Proposals are great on paper, but what the tens of millions of current and future Social Security beneficiaries want to know is whether Joe Biden's plan has traction on Capitol Hill. For some Americans, that means looking ahead to midterm elections as a possible catalyst.
In a little over a week's time, on Nov. 8, 2022, midterm elections will take place and the balance of power in both houses of Congress will be up for grabs. However, there are two key reasons midterm elections are virtually certain to fail to provide a path for Joe Biden's Social Security proposal to become law.
First off, there are mile-wide ideological differences between the Democratic and Republican parties as to how Social Security should be fixed. Without getting too far into the weeds and minutiae, Democrats favor raising revenue by increasing taxation on high earners, while Republicans prefer to reduce long-term outlays by gradually raising the full retirement age. Both solutions work to strengthen Social Security, albeit on very different timelines.
But therein lies the problem. Because both parties have a core proposal that makes Social Security stronger, neither has been willing to work with their opposition to find anything resembling common ground.
This leads to the second reason Biden's Social Security plan has no legs in Washington, D.C.: There aren't enough votes in the Senate. Regardless of which party controls the U.S. Senate after the midterm election, neither will have anywhere close to 60 seats. I mention this figure because 60 "yes" votes are required to amend the Social Security program. This means President Biden would need bipartisan support from at least a handful of Republicans in the Senate to pass his plan; and to date, no members of the GOP have shown support for Biden's proposal.
Despite the promise of a new Congress taking shape in the months to come, Social Security legislation seems destined to stall for at least another two years.
