Although the average Social Security benefit is a relatively modest $1,835 per month for retired workers, as of April 2023, it's nevertheless a vital source of income for the vast majority of seniors.
In each of the past 22 years, national pollster Gallup has asked an assortment of seniors how reliant they are on their monthly Social Security check. No fewer than 80% of retirees spanning all 22 years have stated that they lean on their payout as either a "major" or "minor" income source. In other words, ensuring that America's most-successful retirement program remains on solid financial footing is of the utmost importance.
Unfortunately, Social Security's financial foundation is cracking, and the American public is looking to Washington, D.C., for a fix. The big question is: Do lawmakers, beginning at the top with President Joe Biden, have the answers?
Joe Biden listening to former President Barack Obama. Image source: Official White House Photo by Pete Souza.
Social Security's $22.4 trillion black hole
Before digging into what the president has proposed to strengthen Social Security, let's first spend some time getting a better understanding of why Social Security is in financial trouble.
Every year since the first retired worker payment was made in 1940, the Social Security Board of Trustees has released a report that examines the current financial status, as well as short-term (10-year) and long-term (75-year) outlook, of the program. Since 1985, the Trustees have cautioned that incoming revenue wouldn't be sufficient to cover outlays (i.e., benefits and administrative expenses) over the 75 years following the release of a report.
As of the 2023 report, Social Security's long-term funding obligation shortfall reached $22.4 trillion, which is $2 trillion more than the long-term shortfall forecast in the 2022 Trustees Report. What decades of Trustees Reports have shown is that the longer Congress waits to act, the larger the Social Security's funding black hole will grow.
The Trustees Report also estimates that if lawmakers fail to address the program's shortcomings, its more than $2.8 trillion in asset reserves -- excess cash built up since inception that's invested, by law, in special-issue bonds -- could be depleted in as little as 10 years for the Old-Age and Survivors Insurance Trust (OASI). If that were to happen, sweeping cuts of up to 23% may be needed for retired workers and survivors to sustain payouts without the need for any further cuts until 2097.
The reason Social Security is such a financial mess has to do with a long list of demographic changes, some of which you may be familiar with. While I've previously discussed these demographic shifts in far greater detail, the key shifts include a 57% decline in legal immigration into the U.S. over the past 25 years, a record-low for U.S. birth rates, rising income inequality, increased longevity, and baby boomers steadily retiring from the labor force.
Joe Biden has proposed a four-point fix to strengthen Social Security
Prior to being elected president in November 2020, then-candidate Joe Biden released a four-point plan designed to strengthen America's top retirement program. Biden's plan seeks to generate boatloads of additional revenue by increasing taxation on high-earners, and would redistribute some of this revenue to shore up other perceived shortcomings.
1. Reinstate the payroll tax on high earners
The key cog to Biden's Social Security proposal would be to reinstate the 12.4% payroll tax on earned income (wages and salary, but not investment income) above $400,000. If you're employed by someone else, you and your employer split this tax down the middle (6.2% each). Comparatively, you're responsible for the entirety of this 12.4% payroll tax if you're self-employed.
As of 2023, all earned income between $0.01 and $160,200 is subject to the payroll tax. Approximately 94% of working Americans bring home less than $160,200 annually, meaning they're paying into Social Security with every dollar they earn. For the remaining 6%, earnings above $160,200 are exempt from the payroll tax.
What Biden proposed is creating a doughnut hole between the maximum taxable earnings cap (the $160,200 figure in 2023) and $400,000 where earned income remains exempt from the payroll tax. Note, the maximum taxable payroll cap increases with the National Average Wage Index most years, which means this doughnut hole would naturally close over many decades. Meanwhile, earned income over $400,000 would be fully exposed to the payroll tax.
2. Ditch the CPI-W in favor of the CPI-E
Another big Social Security change is Biden's proposal to switch the program's measure of inflation 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 CPI-W is the measure that determines annual cost-of-living adjustments (COLA) -- i.e., the "raises" beneficiaries receive most years to account for inflation. The problem is the CPI-W does a poor job of tracking the inflation most program recipients are dealing with. Even though seniors make up the bulk of Social Security's beneficiaries, the CPI-W is tracking the spending habits of predominantly working-age Americans (urban wage earners and clerical workers) who aren't receiving a Social Security benefit.
The CPI-E, as its name implies, would solely track the spending habits of households with persons aged 62 and over, which would, in theory, provide a more accurate (and higher) annual COLA.
3. Bolster the special minimum benefit
Though it may be a fact that flies under the radar, Social Security does have a special minimum monthly benefit for lifetime low-earning workers. In 2023, the special minimum benefit for someone with 30 years of coverage is $1,033.50/month.
However, a $1,033.50 monthly check is still well below the federal poverty level for a single filer of $1,215 (per month) this year. Biden's plan would see Social Security's special minimum benefit increases to 125% of whatever the federal poverty level is for a single filer in a given year. In 2023, it would have raised this payout to $1,518.75.
4. Lift payouts for aged beneficiaries
The fourth and final Social Security change proposed by Biden is a gradual increase of 1% annually to the primary insurance amount (PIA) for aged beneficiaries. This 1% annual PIA increase would begin at age 78 and continue through age 82, equating to an aggregate of 5%.
The "why?" behind this increase has to do with older Americans dealing with higher costs as they age. Prescription drug expenses, medical visits, and even transportation costs to get to a doctor's office, can all increase as a person ages. Increasing the PIA gradually is designed to offset some of this added cost burden.
Image source: Getty Images.
The grim reality of Joe Biden's Social Security proposal
Like most proposals, it all sounds great on paper. Social Security would bring in additional revenue, and that revenue would help fuel higher annual COLAs for all 66 million-plus beneficiaries, an increase in the special minimum benefit for lifetime low earners, and higher payouts for retirees as they age. But there's a grim reality to Biden's proposal that needs to be addressed.
While doing something about Social Security's long-term funding shortfall is better than doing nothing, an analysis of Biden's proposal by Urban Institute shows that his four-point plan does very little to extend the solvency of the program's asset reserves. Remember, once the asset reserves are depleted, sweeping benefit cuts are needed to sustain payouts.
According to Urban Institute, Biden's four-point plan would "extend the life of the trust funds by about five years."
If Biden were to simply propose an increase on taxation to high earners and made no other changes to the program, the solvency issues of the trust funds would have been kicked much further down the road. In fact, an analysis from the Social Security Administration's Office of the Chief Actuary (OCACT) estimates that exposing all earned income to the payroll tax would extend the solvency of the trust funds by "about 35 years." Biden's additional proposals to beef up COLA payouts, lift the special minimum benefit, and increase the PIA for aged beneficiaries, negates the bulk of the revenue boost from reinstating the payroll tax on the rich.
The OCACT's analysis also clearly shows that taxing high earners isn't a solution by itself. Although it would kick the problem further down the road, other pathways will need to be considered to completely tackle Social Security's $22.4 trillion (and growing) funding deficit. These solutions may include a payroll tax increase above 12.4% on earned income, and/or an increase in the full retirement age -- i.e., the age a person becomes eligible to collect 100% of their monthly retirement benefit.
