For Social Security's more than 66 million monthly beneficiaries, 2023 is a fantastic year. Retired workers, survivors, and the long-term disabled received their largest cost-of-living adjustment (COLA) on a percentage basis in 41 years and the biggest boost to their monthly payout in nominal-dollar terms in the program's storied history. With Medicare Part B premiums also modestly declining, many retirees are enjoying a real-money (i.e., above and beyond the prevailing inflation rate) increase to their monthly take-home.
Unfortunately, this victory for retirees is bound to be short-lived. That's because Social Security is facing a massive long-term funding shortfall that's been growing larger with each passing year.
President Joe Biden believes he has the solution to Social Security's long-term funding issues. The question is, will Democrat and Republican lawmakers be on board with the president's proposal?
Joe Biden delivering remarks. Image source: Official White House Photo by Hannah Foslien.
Social Security's $20.4 trillion funding shortfall has been building for decades
Before diving into Biden's four-point plan to change Social Security, it helps to understand just how big of a deficit the program is facing over the long run, as well as what factors are fueling this funding shortfall.
Since 1940, the Social Security Board of Trustees has released an annual report detailing the health of the program. This report, which is often in excess of 200 pages, provides a comprehensive history of every dollar collected by Social Security, as well as where each of those dollars was distributed, for more than eight decades. It also makes educated assumptions as to the future solvency of Social Security based on fiscal policy and a host of ever-changing demographic factors.
According to the 2022 Trustees Report, the program is an estimated $20.4 trillion short of its funding needs through 2096. In other words, if payouts were to continue with annual cost-of-living adjustments, there would be a more than $20 trillion funding gap between 2022 and 2096. If this shortfall isn't resolved by raising additional revenue, cutting outlays, or some combination of the two, retired worker and survivor benefits could be slashed by 23% in 2034.
Keep in mind that Social Security's funding issues didn't crop up overnight. The Trustees Report has been highlighting the program's lack of sufficient long-term funding every year since 1985. This widening deficit for the program has to do with myriad demographic shifts, including the ongoing retirement of baby boomers, historically low birth rates, widening income inequality, increased longevity, and reduced legal immigration into the U.S.
Joe Biden has a four-step plan to alter Social Security
Prior to being elected president in November 2020, Biden released a four-point proposal that he proclaimed would strengthen America's top retirement program by extending its solvency. In no particular order, Biden seeks to:
- Increase payroll taxation on the wealthy
- Boost the special minimum benefit for lifetime low earners
- Raise benefits, via the primary insurance amount, for long-lived beneficiaries (ages 78 to 82)
- Shift the COLA tether to the Consumer Price Index for the Elderly (CPI-E)
The linchpin to Biden's proposal is to increase the 12.4% payroll tax on high earners. In 2023, all earned income (wages and salary) between $0.01 and $160,200 is subject to the payroll tax. If you work for someone else, you and your employer split this tax liability down the middle. Meanwhile, the self-employed are on the hook for the full 12.4% tax up to the maximum taxable earnings cap (the $160,200 figure).
With Biden's plan, the payroll tax would be reinstated for earned income above $400,000 while creating a doughnut hole where collection would remain exempt for wages and salary between the maximum taxable earnings cap and $400,000. Since inflation tends to steadily lift the maximum taxable earnings cap over time, this doughnut hole should completely close in a few decades.
The key point is that wealthy individuals would be relied on to pay more into the program, which would immediately boost revenue.
The other key change is shifting the inflation measure that determines COLA from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the CPI-E. Since the CPI-E is focused on tracking the spending habits of seniors, the belief is it will more accurately reflect the inflation they're contending with each year. As a reminder, senior citizens account for the lion's share of Social Security's beneficiaries.
If the CPI-E were used in place of the CPI-W, the average annual cost-of-living adjustment would be expected to modestly increase.
Image source: Getty Images.
Is Congress on board with Biden's Social Security changes?
Although Biden hasn't publicly pushed for his Social Security reform plan in the two years since entering the Oval Office, he has remained adamant that he won't approve any legislation that reduces Social Security benefits. During Biden's State of the Union address last week, he exclaimed,
[S]o tonight, let's all agree (apparently, we are). Let's stand up for seniors. Stand up and show them we'll not cut Social Security; we'll not cut Medicare. Those benefits belong to the American people -- they earned it. If anyone tries to cut Social Security, which apparently no one is going to do ... if anyone tries to cut Medicare, I'll stop it. I'll veto it.
With both Democrats and Republicans cheering Biden's remarks, it raises the question: Does the president have the support of lawmakers in Congress to enact changes to Social Security?
Despite the thunderous applause Biden received for these remarks, the answer is almost assuredly no, for a variety of reasons.
To start with, Republicans are ideologically miles apart from Democrats when it comes to fixing Social Security. Although both parties agree that a resolution is needed to strengthen the program, neither side has been willing to find anything resembling common ground with their opposition. Just as Biden vowed to veto any legislation that would seek to increase the full retirement age and lower lifetime benefits for future generations of retirees, Republican lawmakers have expressed opposition to specifically targeting high earners as a means to raise additional revenue for Social Security.
Another problem the president would run into is gaining the necessary votes in the upper house of Congress. Amending Social Security requires 60 votes in the U.S. Senate. However, it's been 44 years since either party held a supermajority of at least 60 seats. In other words, all Social Security amendments are going to require bipartisan cooperation, which, as noted, has been nonexistent.
Lastly, the math behind Biden's Social Security plan isn't as favorable as you might think. Based on an analysis conducted by the Urban Institute in October 2020, Biden's proposal only improves the program's solvency by five years. Since much of the revenue boost from taxing high earners is diverted to beefier COLAs, a higher special minimum benefit, and boosted primary insurance amounts to long-lived beneficiaries, Biden's plan would likely struggle to gain broad support in Congress.
While the public debate will continue, Joe Biden's Social Security changes are unlikely to find a path to approval.
