In November, 48.5 million retired workers brought home an average Social Security benefit check of $1,677.52. That might not sound like a lot, but for nearly 90% of these retirees, it's a necessary source of income that helps cover their expenses. All told, Social Security income lifted 16.1 million seniors (aged 65 and over) out of poverty in 2020. 

However, this storied program isn't without its shortcomings -- and lawmakers know it. Numerous members of Congress, and even President Joe Biden, have offered solutions designed to strengthen Social Security, which is facing a greater than $20 trillion funding shortfall over the next 75 years. But what you might be surprised to learn is that Biden's top economic advisor doesn't entirely see eye to eye with the president.

President Joe Biden delivering remarks during a press conference.

President Biden delivering remarks. Image source: Official White House photo by Adam Schultz.

Joe Biden's Social Security plan entails boosting revenue

Prior to being elected president in November 2020, Biden released a four-point plan to improve Social Security's financial footing. This key takeaway of this proposal is that it would raise additional revenue in an attempt to offset the program's widening long-term deficit.

Though you can read about Joe Biden's Social Security solution in greater detail, the single most important change he proposed was increasing payroll taxation on high-earning workers.

In 2023, all earned income (we're talking about wages and salary, not investment income) between $0.01 and $160,200 is subject to the 12.4% payroll tax. This is the tax that provides about 90% of Social Security's annual revenue, which it then disburses to eligible beneficiaries. Any earned income above $160,200 is exempted from the payroll tax. Every year, well over $1 trillion in earnings avoids Social Security's payroll tax.

Biden's proposal would reinstate the payroll tax on earned income above $400,000 and created a doughnut hole between the maximum taxable earnings cap (the $160,200 figure) and $400,000, where earned income would remain exempt. Because the maximum taxable earnings cap rises over time, this doughnut hole would eventually close many years down the line.

The thinking here is that if a larger scope of earned income were subjected to the payroll tax, revenue for Social Security would receive an immediate boost.

Top economic advisor Janet Yellen believes entitlement spending cuts are inevitable

Raising additional revenue for a so-called "entitlement program," such as Social Security, is something former Fed Chair and current Treasury Secretary Janet Yellen can get behind. But Biden's top economic advisor isn't of the same opinion that Social Security's issues can be resolved simply by taxing the rich.

In 2018, Yellen was one of five co-authors to produce an opinion piece published by the Washington Post, saying: "A debt crisis is coming. But don't blame entitlements." In this op-ed, the authors wrote: 

There is room for additional spending reductions in these [entitlement] programs, but not to an extent large enough to solve the long-run debt problem. The Social Security program needs only modest reforms to restore its 75-year solvency, and these should include adjustments in both spending and revenue.

Biden has made clear his goal is to raise revenue. However, Yellen's approach would also involve spending reductions for Social Security.

Scissors cutting a one-hundred-dollar bill in half.

Image source: Getty Images.

What would "cutting" Social Security benefits look like?

How, exactly, are Social Security benefits "cut?"

The first possible method would be to gradually increase the full retirement age (FRA), currently 67 for anyone born in 1960 or later. The FRA is the age where retirees become eligible to receive 100% of their monthly benefit. If the FRA were increased over time, it would require future beneficiaries to make a choice to either take their payout early and accept a permanent reduction, or to wait longer to receive their full benefit. Either way, lifetime benefits paid would be reduced.

A second way to reduce Social Security expenditures would be to utilize the Chained Consumer Price Index as the program's measure of inflation in place of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Chained CPI takes substitution bias into account -- i.e., if one good or service becomes pricey, consumers will trade down to a less-costly similar good or service. The Chained CPI would result in lower cost-of-living adjustments over time.

The third way Social Security spending could be cut is simply by reducing benefits. According to the 2022 Social Security Board of Trustees Report, the Old-Age & Survivors Insurance Trust Fund (OASI) is expected to exhaust its cash reserves by 2034. If this were to happen, sweeping benefit cuts of up to 23% may be necessary to sustain benefit checks to retired workers through 2096, without any further reductions.

A dual approach will likely be necessary to truly strengthen Social Security

While Janet Yellen's admission that "adjustments in both spending and revenue" may not sit well with current and future beneficiaries, a dual approach that aims to raise revenue and manage future outlays is the best path to strengthening America's top retirement program.

Raising revenue by expanding the payroll tax on high earners would probably add decades to Social Security's solvency time line. Unfortunately, raising the payroll tax alone wouldn't be sufficient to cover the $20.4 trillion cash shortfall Social Security is facing through 2096.

Likewise, raising the full retirement age isn't a solution that would provide an immediate benefit. Gradually increasing the FRA would take decades to provide any meaningful cost savings, which is of no help to the OASI -- it's 12 years from an expected exhaustion of its remaining $2.8 trillion in asset reserves.

However, putting these two ideologically opposite ideas together would make a lot of sense. Biden's proposal to increase the payroll tax would add immediate revenue, while cost-cutting measures would help to reduce outlays decades down the road. As we near the OASI's asset reserve depletion date in 2034, look for Yellen's proposal to gain traction.