In November, nearly 66 million Americans, many of whom are aged 62 and over, received a Social Security benefit. For the 48.5 million who are retired workers, these payouts are widely viewed as a necessity to cover their expenses.
But despite providing a financial foundation for our nation's retirees, America's top retirement program finds itself in deep trouble. President Joe Biden believes he has the solution that can resolve what ails Social Security, but he's going to need the help of newly elected lawmakers to fix it.
President Biden delivering remarks. Image source: Official White House Photo by Adam Schultz.
Retired workers could be less than 12 years away from having their benefits cut
For each of the past 83 years, the Social Security Board of Trustees has released a report that's examined the financial status of the program over the short term (the next 10 years) and long term (75 years following the release of a report). The Trustees Report effectively acts as Social Security's balance sheet and allows anyone to see how revenue is collected and where those dollars end up.
In addition to backward-looking financial data, the Trustees Report factors in changing macroeconomic and demographic factors to determine the financial health of Social Security.
The 2022 Trustees Report showed that Social Security had dug its largest hole yet: an estimated $20.4 trillion funding shortfall through 2096. For what it's worth, every Trustees Report since 1985 has projected a long-term funding shortfall.
Social Security's increasingly dire financial footing is primarily a result of demographic shifts. Examples include historically low U.S. birth rates, a near-halving in net immigration into the country over two decades, and growing income inequality, among other factors. With these changes weighing on the worker-to-beneficiary ratio, it would appear the program's financial foundation will only worsen.
Based on last year's projections, the asset reserves for the Old-Age and Survivors Insurance Trust Fund (OASI) are expected to run out in 2034. The OASI is the Trust responsible for paying benefits to 48.5 million retired workers each month, as well as nearly 5.9 million survivors of deceased workers. If this excess cash were to be exhausted within the next 12 years, the Trustees believe an across-the-board benefit cut of 23% would be necessary to sustain payouts through 2096. For context, a 23% benefit cut would reduce the average Social Security check by roughly $420 per month (In January 2023 dollars), or $5,000 per year.
While Social Security is in no danger whatsoever of becoming insolvent, the size of Social Security checks paid to retired workers 12 years from now is very much in question.
Image source: Getty Images.
Joe Biden has proposed sweeping reforms for Social Security
In 2020, prior to his election as president, then-candidate Joe Biden released a plan he believed would strengthen Social Security for decades to come. Although there are four Social Security changes Biden is seeking, two stand out as key to shoring up the program.
This biggest Social Security change proposed by Biden would tackle income inequality head-on and generate a lot of extra revenue.
In 2023, Social Security's 12.4% payroll tax is applicable to earned income between $0.01 and $160,200. "Earned income" means wages and salary but not any sort of investment income. Approximately 94% of all working Americans earns less than the maximum taxable earnings cap (the $160,200 figure). For the other 6% of workers, earned income above this $160,200 level is exempt from the payroll tax.
Joe Biden's proposal would create a doughnut hole between the maximum taxable earnings cap and $400,000 where earned income would remain exempt, as well as reinstate the payroll tax on earned income above $400,000. Since the maximum taxable earnings cap tends to rise over time with inflation, this doughnut hole would eventually close decades down the line. This immediate increase in payroll tax revenue should push back the asset reserve depletion date of the OASI.
The other notable Social Security change President Biden is seeking is the replacement of the program's measure of inflation.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been used to determine Social Security's annual cost-of-living adjustment (COLA). Unfortunately, as its name implies, this is a price-measuring index focused on the spending habits of "urban wage earners and clerical workers." In other words, people who generally aren't receiving a Social Security benefit.
Biden would like to see the Consumer Price Index for the Elderly (CPI-E) used to calculate COLA instead of the CPI-W. The CPI-E specifically tracks the spending habits of older Americans, which would likely provide a larger annual cost-of-living adjustment.
Is a new Congress the recipe Biden needs to reform Social Security?
The challenge for Joe Biden -- and frankly, every other president for more than three decades -- is that he needs the support of lawmakers in Congress to amend the Social Security Act. Just a few days ago, the 118th Congress officially took shape.
The big question is: Will this new Congress work with the president to effect Social Security reform? If I were to give the Magic 8 Ball a shake, the "All signs point to no" answer would almost assuredly pop up.
Whereas the previous Congress featured a razor-thin majority in the U.S. Senate for Democrats, as well as a modest majority in the House of Representatives, the new Congress features a shift to a slight majority in the House for Republicans.
Democrats and Republicans both agree that Social Security needs attention. However, they've approached their respective fixes from completely different viewpoints. Whereas Biden's proposal seeks to raise additional revenue from high-earners and boost benefits for low-earning workers, the Republican solution aims to increase the full retirement age and shift the inflationary measure to the Chained CPI. Without getting too far into the weeds, the GOP plan focuses on reducing long-term outlays to save Social Security money. In short, both parties have solutions that work, albeit on very different timelines and with ideologically opposite approaches.
The other challenge for Biden is getting the necessary votes in the Senate to amend Social Security. In the upper house of Congress, 60 votes are needed to amend America's top retirement program. Since neither party has controlled at least 60 votes in the Senate since 1979, it means all legislation proposing to alter Social Security would require bipartisan support. Garnering that support has proved virtually impossible for every president since Ronald Reagan.
Though a new Congress has taken shape, Biden's Social Security changes are extremely unlikely to find legislative support.
