For most Americans, Social Security doesn't just provide "some check" they'll receive after they retire. According to national pollster Gallup, Social Security supplies a source of income retirees deem necessary to make ends meet. Since 2002, anywhere from 80% to 90% of annually surveyed retirees lean on their monthly payout to some degree to cover their expenses.
Although Social Security is the U.S.'s most successful retirement program, having provided retired workers with benefits for 82 years (and counting), it's on shaky ground. And as the sustainability of Social Security payouts comes into question, it's lawmakers who come into focus -- specifically President Joe Biden.
Joe Biden listening to then-President Barack Obama. Image source: Official White House Photo by Pete Souza.
Could you handle a 23% cut to your Social Security benefit?
Since retired worker payouts began in 1940, the Social Security Board of Trustees has released a report each year that examines the financial state of the program. This often-lengthy report takes into account demographic changes, fiscal policy implemented by Congress, and a multitude of other factors to provide an all-encompassing look at how firm the foundation is for Social Security over the short term (the next 10 years) and long term (the next 75 years).
The problem is that the Trustees Report has been warning that long-term revenue wouldn't be sufficient to cover payouts, including cost-of-living adjustments (COLA), since 1985. As time has passed, the projected long-term cash shortfall has grown. The 2022 Trustees Report estimates that Social Security has a $20.4 trillion cash deficiency through 2096.
If there's a positive takeaway here, it's that Social Security can't go bankrupt as long as people keep working. Around 90% of the revenue collected by Social Security comes from the 12.4% payroll tax on earned income, such as wages and salary. But just because Social Security is in no danger of insolvency, that doesn't mean it's financially healthy.
Without any changes, the Trustees Report predicts the Old-Age and Survivors Insurance Trust Fund, which is responsible for doling out payments to more than 48 million retired workers each month, will require an across-the-board 23% benefit cut by 2034. For the typical retired worker, we'd be talking about thousands of dollars in reduced annual benefits.
Biden has offered a four-point plan to strengthen Social Security
With Social Security's dilemma well-known, Biden laid out a four-point plan to strengthen the program while on the campaign trail prior to his 2020 election. The core of Biden's proposal involves generating more payroll tax revenue, as well as increasing benefits for aged beneficiaries and lifetime low-earners who need it most.
1. Lift payroll taxation on high earners
The most notable change proposed by Biden involves collecting more payroll tax revenue from high-earning workers. In 2023, all earned income between $0.01 and $160,200 is subject to the 12.4% payroll tax. However, wages and salary above $160,200 aren't subjected to this tax. Well over $1 trillion in earned income "escapes" the payroll tax this way every year.
Biden's plan would reinstate the payroll tax on earned income above $400,000, while creating a doughnut hole between the maximum taxable earnings cap (the $160,200 figure in 2023) and $400,000 where earned income would remain exempt. Since the maximum taxable earnings cap increases over time, this doughnut hole would eventually close and subject all earned income to the payroll tax.
2. Change Social Security's measure of inflation from the CPI-W to the CPI-E
The other sweeping change Biden is offering is to shift 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 issue with the CPI-W is that it tracks the spending habits of "urban wage earners and clerical workers," which doesn't make much sense when senior citizens make up the bulk of Social Security beneficiaries. Since the CPI-E specifically tracks the expenditures of seniors, it should result in more accurate cost-of-living adjustments being passed along to beneficiaries.
3. Increase the special minimum benefit
A third Social Security reform proposed by Biden involves increasing the special minimum benefit paid to lifetime low-earning workers.
This year, the maximum payout for a lifetime low-earner with 30 years of coverage is just $951 per month. That's more than $180/month below the federal poverty level for a single filer. Under Biden's plan, the special minimum benefit would rise to 125% of the federal poverty level. For a lifetime low-earner, it would mean a monthly payout boost of nearly $500.
4. Boost the primary insurance amount for aged beneficiaries
The fourth and final change would see the primary insurance amount (PIA) steadily increased over time for older beneficiaries. Specifically, the PIA would grow by 1% annually from ages 78 through 82 until a 5% cumulative increase was realized.
The purpose of boosting the PIA is to account for higher late-in-life expenditures. As we age, things like medical transportation costs and prescription drugs can become costlier. This would help offset some of those expenses.
Image source: Getty Images.
Is 2023 the year Biden's Social Security plan becomes reality?
The all-important question is: Will a new year will bring new opportunities for Joe Biden to leave his mark on America's top retirement program?
The answer is almost assuredly no.
One thing the New Year will bring is a changed Congress. Following midterm elections, Democrats retained control of the U.S. Senate, while Republicans narrowly took back control of the U.S. House of Representatives. In other words, we're moving from a situation where Biden's party controlled both chambers of Congress to now only controlling one of them (assuming lawmakers vote strictly along party lines). That sort of deadlock usually leads to little legislation getting passed.
The bigger problem for Joe Biden, and pretty much every president for the past four decades, is that getting the needed votes in the U.S. Senate to amend Social Security has been impossible. Whereas a simple majority of the vote suffices in the House, 60 votes are needed in the Senate to make changes to the Social Security program. Neither party has held 60 seats in the Senate since the late 1970s. This means any major overhaul to Social Security will require bipartisan support.
As things stand now, both parties believe they have the superior plan to strengthen Social Security. While Democrats favor raising additional revenue and switching the inflationary measure to the CPI-E, Republicans prefer gradually increasing the full retirement age and utilizing the Chained CPI, which takes substitution bias into account, in place of the CPI-W. These proposals are ideologically miles apart, and neither side has been willing to work with their opposition to find common ground.
Even with a different Congress, Joe Biden has virtually no chance to enact his four-point Social Security plan in 2023.
