For many of Social Security's more than 66 million recipients -- 49.1 million of whom are retired workers -- the monthly income they receive is vital to their financial well-being. Over the past 20 years, between 80% and 90% of the retirees national pollster Gallup has surveyed annually have responded that Social Security benefits are needed, in some capacity, to cover their expenses.
But this much-relied-upon program finds itself at a crossroads. Although it can never go bankrupt or become insolvent, its financial foundation is beginning to crumble. The tens of millions of Americans who count on their monthly payout as a necessary source of income are looking to lawmakers in Washington, D.C., to strengthen America's top retirement program -- and it all starts at the top with President Joe Biden.
President Biden delivering remarks. Image source: Official White House Photo by Adam Schultz.
America's top retirement program is facing a $22.4 trillion funding shortfall
Before digging into Biden's plan to "fix" Social Security, it would first help to understand why the program is facing an uncertain future.
Since the first retired worker benefit check was mailed in 1940, the Social Security Board of Trustees has released an annual report detailing the short-term (10-year) and long-term (75-year) outlook for the program. This report also provides an under-the-hood look at how Social Security generates revenue, and where those dollars ultimately end up.
Every year since 1985, the Trustees Report has cautioned that Social Security's long-term revenue collection would be insufficient to cover payouts, inclusive of annual cost-of-living adjustments (COLAs). In other words, projected revenue collected in the 75 years following the release of a report wouldn't be enough to cover expected benefit outlays. The magnitude of this funding shortfall has been growing over nearly four decades, hitting a jaw-dropping $22.4 trillion in the 2023 Trustees Report.
What's interesting is there is no single issue with Social Security that we can point to and say, "That's why Social Security is financially struggling." Rather, it's a confluence of factors working together that have dug this more than $22 trillion funding obligation hole.
While you can read about the problems facing Social Security in greater detail, the short version is that a number of demographic changes are to blame. This includes baby boomers retiring, increased longevity since 1940, growing income inequality, record-low U.S. birth rates, and a more than halving of the net-legal migration rate into the U.S. over the past 25 years.
What's at stake is simple: the financial well-being of our nation's retired workforce. Based on estimates from the newest Trustees Report, the Old-Age and Survivors Insurance Trust (OASI), which is responsible for making monthly retirement and survivor benefits, is expected to exhaust its asset reserves by 2033. Should this happen, sweeping benefit cuts of up to 23% may be necessary to ensure no additional benefit cuts are needed through 2097.
Joe Biden has a sweeping four-point plan to strengthen Social Security
Prior to his election as president in November 2020, then-candidate Biden laid out a four-point plan designed to overhaul Social Security and strengthen the program. Biden's plan called for increased taxation on the wealthy, as well as higher payouts for aged beneficiaries and lifetime low-earners.
1. Increase payroll taxation on high earnings
The core proposal of Biden's four-point plan is to increase the amount of payroll tax paid by our nation's highest earners.
In 2023, all earned income (meaning wages and salary, but not investment income) between $0.01 and $160,200 is subject to the 12.4% payroll tax. Approximately 94% of working Americans earn less than the maximum taxable earnings cap (the $160,200 figure) and will therefore pay into Social Security with every dollar they earn. Meanwhile, earned income above $160,200 is exempt from Social Security's payroll tax.
Biden's plan is simple: He wants to reintroduce the 12.4% payroll tax on earned income above $400,000 to boost Social Security's revenue. A doughnut hole would be created for wages and salary between the maximum taxable earnings cap and $400,000, where earnings would remain exempt from the payroll tax. However, this doughnut hole would close over time due to natural increases in the maximum taxable earnings cap.
2. Switch the program's inflationary measure from the CPI-W to the CPI-E
Another big change proposed by President Biden is switching from the program's current measure of inflation, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), to the Consumer Price Index for the Elderly (CPI-E).
Although the CPI-W has been Social Security's annual inflationary tether since 1975, it's not doing a particularly good job of accounting for the inflation that seniors are facing. The CPI-W tracks the spending habits of "urban wage earners and clerical workers" who, generally speaking, are of working age and not collecting a Social Security benefit. As a result, Social Security's annual COLAs aren't reflective of the inflation seniors are contending with.
By comparison, the CPI-E is an inflationary index focused solely on seniors. The expectation is that cost-of-living adjustments would be modestly higher with the CPI-E in place.
3. Gradually increase the primary insurance amount for aged beneficiaries
As we age, certain expenses can grow, such as shelter, prescription drugs, and medical transportation costs. To counter the likelihood of late-in-life expenses sapping the financial stability of aging Americans, Biden has proposed gradually increasing the primary insurance amount (PIA).
According to the proposal, the PIA would increase by 1% annually, beginning at age 78 and continuing through age 82. This works out to a 5% aggregate increase in the PIA for aged beneficiaries, which would help to offset rising expenses.
4. Boost the special minimum benefit
The fourth and final Social Security change proposed by Joe Biden is to increase the special minimum benefit paid to lifetime low-earning workers.
In 2023, a lifetime low-earning worker with 30 years of coverage would max out with a benefit check of $1,033.50 per month, or $12,402 annually. For context, the federal poverty level for a single filer in 2023 is $14,580. Biden's plan would boost the special minimum benefit to 125% of the federal poverty level. For a single filer in 2023, it would raise their monthly maximum payout from $1,033.50 to $1,518.75.
Image source: Getty Images.
Joe Biden's Social Security overhaul has a sizable flaw
Superficially, the reforms Biden proposed in 2020 achieve two goals: They would generate additional revenue from high-earning worker,s and would likely increase benefits for older Americans, lifetime low-earning workers, and for all beneficiaries over time via the use of the CPI-E in place of the CPI-W.
Unfortunately, the president's plan has an unmistakable flaw that would make its passage virtually impossible on Capitol Hill.
In October 2020, not long after then-candidate Biden unveiled his four-point Social Security reform plan, The Urban Institute, a Washington, D.C.-based think tank, analyzed the impact it would have on the program's trust funds. While taxing high earners would extend the life of the trust funds before benefits cuts would become necessary, Urban Institute found that Biden's three additional proposals would negate most of this revenue boost. It was estimated that Biden's four-point plan would only push back Social Security's judgment day by five years.
The insurmountable problem with Joe Biden's proposal is that taxing the rich doesn't, by itself, come close to closing Social Security's estimated long-term funding shortfall.
For the program to be truly strengthened for decades to come, a bipartisan proposal that raises additional revenue and mindfully reduces long-term expenses is needed.
But herein lies another issue: Ideologically, Democrats and Republicans are worlds apart when it comes to "fixing" Social Security. To amend Social Security, 60 votes are needed in the Senate -- and it's been 44 years since either party last held a supermajority of votes in the upper house of Congress. This means no legislation will be passed without bipartisan support.
At the moment, Republicans are unwilling to vote in favor of legislation that specifically increases payroll taxation on high earners, while Democrats have declared any reforms that reduce benefits a nonstarter. Until lawmakers are willing to work together and find common ground, Social Security's long-term funding shortfall is liable to keep growing.
