Stop me if you've heard this one before: The U.S. has, once again, reached its debt limit -- i.e., the authorized amount of money the federal government can borrow to fund existing legal obligations. Since 1960, the U.S. Treasury notes that the debt ceiling has been raised a whopping 78 times. In all likelihood, this figure will soon rise to 79.
As elected officials on Capitol Hill discuss ways to better manage federal spending and slow the pace of America's rising outstanding debt, some lawmakers (mostly within the Republican Party) have called for spending reductions in Social Security and Medicare.
However, newly elected House Speaker Kevin McCarthy (R-CA) was crystal clear about the prospect of reducing spending on these all-important retirement programs in an interview on Face the Nation last week. Said McCarthy,
Let's take those [Social Security and Medicare] off the table. If you read our Commitment to America, all we talk about is strengthening Medicare and Social Security.
While McCarthy has echoed President Joe Biden's stance that Social Security benefit cuts aren't a talking point in any federal spending discussion, history tells a different story about whether benefit reductions are really "off the table."
Image source: Getty Images.
Congress has a precedent for passing bipartisan Social Security legislation
Before digging into legislative specifics, it's important to understand the magnitude of the problem facing Social Security.
Every year since retirement benefits began in 1940, the Social Security Board of Trustees has released a detailed report examining the funding mechanisms of the program and essentially determining how financially sound it will be over the next 75 years. Based on the 2022 Trustees Report, Social Security is staring down an estimated $20.4 trillion funding shortfall through 2096.
In simpler terms, Social Security's Old-Age and Survivors Insurance Trust Fund is now 11 years away from completely exhausting its asset reserves -- the amount of excess cash built up since inception, which is currently invested in extremely safe interest-bearing government bonds. If these asset reserves run out by 2034, sweeping benefit cuts of up to 23% might be necessary for retired workers to sustain payouts without any additional reductions through 2096.
While this might sound like a daunting task to tackle, Washington has done it before. In 1983, Social Security's asset reserves were running on fumes and facing exhaustion. Then-president Ronald Reagan and Congress eventually worked out a bipartisan deal (the Social Security Amendments of 1983) to strengthen America's top retirement program.
This overhaul included core "fixes" from both political parties. It gradually increased payroll taxation over time and established the taxation of benefits on high-earning beneficiaries, solutions Democrats had pushed for. Meanwhile, the Social Security Amendments of 1983 also allowed for a gradual increase to the full retirement age over four decades, which Republicans had favored.
Reforming Social Security has been especially difficult because it requires 60 votes in the Senate to amend the program. The last time either political party had a supermajority of at least 60 seats in the upper house of Congress was 1979. In other words, bipartisan cooperation is a must if Social Security legislation is to become law -- and we won't have that cooperation unless both sides find some form of common ground. Precedent has shown that spending cuts/benefit reductions have been part of this bipartisan cooperation.
Joe Biden listening to former President Barack Obama. Image source: Official White House Photo by Pete Souza.
Joe Biden has previously been open to the idea of Social Security benefit cuts
Additionally, history suggests that President Biden might be more amicable to a bipartisan solution than his speeches and recent proposals would entail.
Prior to the 2020 presidential election, Biden released a four-point plan designed to strengthen Social Security. While you can read about Biden's proposal in greater detail, the key points involve increasing payroll taxation on high earners as well as shifting Social Security's inflation-measuring metric 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 goal of Biden's plan is to increase revenue and return a lot of this excess revenue to low-income and aged beneficiaries.
One point Joe Biden has been crystal clear about since becoming president is that any form of cuts to Social Security aren't up for discussion. But when he was running for the Democratic Party presidential nomination in 2008, Biden's tone was markedly different.
According to a September 2007 article from NBC News, Biden suggested he would work with both parties to keep Social Security solvent, with solutions ranging from increasing the payroll tax cap on high earners to upping the full retirement age being open for discussion.
To build on this point, Washington, D.C.-based think tank Urban Institute ran the math on Joe Biden's four-point Social Security proposal in 2020 and found that increasing taxation on the rich would only extend the solvency of the program by five years. The reason: Much of the extra revenue raised from taxing high earners would be returned via higher special minimum benefits, larger annual cost-of-living adjustments, and beefed-up primary insurance amounts to retired workers aged 78 and above.
Long story short, increasing taxation on high earners alone isn't enough to resolve Social Security's impending funding crisis, which could leave Biden and/or future presidents to make the tough but realistic call of keeping long-term spending reductions for the program on the table.
If history is right, the next major overhaul of Social Security will involve the collection of additional revenue as well as long-term spending cuts.
