The annual State of the Union address by the president is old news now. Most people who watched it more than a week ago have probably forgotten much of what President Joe Biden said.
That's to be expected. Presidential State of the Union addresses usually aren't all that memorable.
There is one thing President Biden said, however, that shouldn't be forgotten. During his speech, he stated that Social Security is "off the books." Here's why retirees should hope he changes his mind.
Image source: Official White House photo by Adam Schultz.
Avoiding the third rail
Social Security is often called "the third rail of American politics." The reference is to the live rail that delivers electricity to trains. The third rail carries enough voltage to kill a person. This analogy underscores just how politically damaging it can be to suggest cuts to Social Security.
Biden is an astute politician who is fully aware of the potential blowback associated with Social Security reform. That's why he raised the issue during the State of the Union address. The president said that "some Republicans want Medicare and Social Security to sunset."
This statement sparked an outcry in protest by Republican senators and representatives. What Biden said was true, though.
Republican Sen. Rick Scott of Florida has proposed sunsetting all federal programs after five years unless reauthorized by Congress. However, the senator's idea met with widespread opposition from others in the GOP, including Senate Minority Leader Mitch McConnell of Kentucky.
After hearing the response from Republicans, Biden responded: "Folk -- so, folks, as we all apparently agree, Social Security and Medicare is off the -- off the books now, right? They're not to be touched?"
The president is almost certainly correct that most politicians in both major political parties have no desire to touch Social Security at all right now. It's the third rail.
Why retirees should want Social Security reform
The reality, though, is that retirees -- as well as Americans who will retire in the coming years -- should want politicians to touch Social Security. By not doing anything, Social Security benefit cuts are definitely on the way.
Last year, the Trustees of the Social Security and Medicare trust funds projected that the Old-Age and Survivors Insurance (OASI) Trust Fund (which pays Social Security retirement and survivors benefits) will be depleted in 2034. When that happens, only 77% of scheduled Social Security benefits will be able to be paid.
There's another separate trust fund, though, called the Disability Insurance (DI) Trust Fund. If the two trust funds were combined, full Social Security retirement benefits could be paid through 2035. After that point, ongoing taxes would be able to pay around 80% of scheduled benefits.
But those projections could be overly optimistic. In December 2022, the nonpartisan Congressional Budget Office estimated that the combined Social Security trust funds would run out of money in 2033. It's quite possible that major benefit cuts could be on the way for retirees in only 10 years.
What's most likely to happen
Biden actually does want to touch Social Security -- or at least he did when he ran for president in 2020. He even alluded to one of his proposals during the State of the Union address. Biden mentioned "making the wealthy pay their fair share."
This was likely a reference to his plan to apply the payroll tax that helps fund Social Security to all income above $400,000 per year. Currently, only income up to $160,200 is subject to the payroll tax.
This proposal or something similar to it could eventually be implemented. In a survey last year conducted by the University of Maryland's Program for Public Consultation (PPC), 80% of Republicans and nearly 90% of Democrats surveyed supported a payroll-tax cap increase.
The main problem, though, is that this change won't be enough to preserve Social Security benefits by itself. The PPC estimated that raising the payroll tax cap would eliminate 61% of the projected Social Security shortfall.
Another way to increase revenue for the federal program is to increase the payroll-tax rate. Raising the payroll tax from 6.2% to 6.5%, for example, would eliminate around 16% of the projected Social Security shortfall, according to the PPC. This proposal also enjoys solid bipartisan support. However, additional actions would still be required to fully preserve Social Security.
That leaves benefits cuts. One potential solution is to means-test Social Security. Reducing benefits for Americans with incomes in the top 20% would eliminate roughly 11% of the projected shortfall. Another idea is to gradually raise the full retirement age. Increasing this age from 67 to 68 for future retirees could eliminate 14% of the projected shortfall, based on the PPC analysis.
Sooner or later, some combination of these proposals seems to be the most likely course of action to avoid Social Security becoming insolvent. The longer politicians wait, however, the more painful the changes could be. Social Security may be "off the books" for now -- but it would be better for retirees if it wasn't.
