For the past 83 years, Social Security has been providing a financial foundation for America's retirees. According to national pollster Gallup, this top-notch retirement program is leaned on by between 80% and 90% of retired workers annually to help make ends meet. In other words, its ongoing existence is paramount to the financial well-being of current and future retirees.
Unfortunately, Social Security's financial foundation has begun to crack, and the possibility of benefit cuts is very much on the table. With Social Security's outlook dimming, the American public is looking to their elected officials for solutions -- and that all starts with President Joe Biden.
President Biden delivering remarks. Image source: Official White House Photo by Hannah Foslien.
Sweeping benefit cuts of up to 23% may await retired workers
Since 1940, the Social Security Board of Trustees has released an annual report that examines the current financial health of America's most important retirement program, as well as assesses how ongoing demographic changes and various fiscal/monetary policy shifts will impact it.
Every Trustees Report since 1985 has cautioned that Social Security's long-term revenue (i.e., revenue collected in the 75 years following the release of a report) would be insufficient to cover the program's outlays. Put another way, Social Security is dealing with a long-term funding obligation shortfall. The 2023 Trustees Report estimated this deficit at a whopping $22.4 trillion through 2097.
As of the end of June 2023, Social Security's Old-Age and Survivors Insurance Trust Fund (OASI), which is responsible for dishing out benefit checks to more than 49 million retired workers and 5.8 survivor beneficiaries each month, had $2.73 trillion in asset reserves. But due to a plethora of adverse demographic changes, this $2.73 trillion is expected to be depleted by 2033. If the OASI's asset reserves were to run dry, the Trustees estimate sweeping benefit cuts of up to 23% may be needed to sustain retired-worker payouts without the need for any additional cuts through 2097.
The major demographic changes impacting Social Security include:
- The steady retirement of baby boomers.
- Increased longevity since retired-worker payouts began in 1940.
- A 57% decline in legal immigration into the U.S. over the past 25 years.
- Rising income inequality.
- Historically low U.S. birth rates.
However, Washington isn't without proposals to combat these challenges and potentially avoid a reduction to benefits.
President Biden has proposed four big changes to Social Security
Prior to being elected president in November 2020, Joe Biden released a four-point plan designed to strengthen Social Security. Then-candidate Biden's proposal aims to tackle the program's funding shortfall head-on by raising additional revenue and effectively bolstering the payouts of all beneficiaries.
1. Reinstate the payroll tax on high earners
The flagship Social Security change proposed by Joe Biden is to increase the amount of tax paid by high earners. In 2023, all earned income between $0.01 and $160,200 is subject to the program's 12.4% payroll tax on earned income -- i.e., wages and salary but not investment income. For the roughly 94% of Americans who earn less than $160,200, it means paying tax on every dollar they earn. Meanwhile, earned income above $160,200 is exempt from the payroll tax.
Although the maximum taxable earnings cap (the $160,200 figure) increases most years in lockstep with the National Average Wage Index, a larger percentage of earnings have "escaped" the payroll tax over the past 40 years.
Biden's plan reinstates the payroll tax on earnings above $400,000, as well as creates a doughnut hole between the maximum taxable earnings cap and $400,000 where earned income would remain exempt. Since the maximum taxable earnings cap increases over time, this doughnut hole would eventually close, thereby exposing all earned income to the payroll tax.
2. Replace the CPI-W with the CPI-E
Biden's second Social Security change is to switch away 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).
The CPI-W has been responsible for calculating Social Security's annual cost-of-living adjustment (COLA) since 1975. While it's a big improvement over the arbitrary COLAs passed along be special sessions of Congress between 1950 and 1975, the CPI-W is still shortchanging seniors. The problem is the CPI-W is focused on the spending habits of "urban wage earners and clerical workers," many of which are working-age Americans who don't receive a Social Security benefit. Comparatively, most Social Security recipients are seniors aged 62 and over.
Meanwhile, the CPI-E specifically tracks the spending habits of senior households. In theory, this should lead to higher annual COLAs for all beneficiaries.
3. Increase the special minimum benefit
Joe Biden has also proposed vastly increasing the special minimum benefit. For a lifetime low-earning worker who has at least 30 years of coverage, the maximum benefit in 2023 is only $1,033.50 per month. That's 15% below the federal poverty level for a single filer this year.
Under Biden's plan, the special minimum benefit would rise to 125% of whatever the federal poverty level is for a given year. Based on 2023's federal poverty rate of $1,215 for a single filer, we'd be talking about an increase to $1,518.75 per month.
4. Gradually raise the primary insurance amount for aged beneficiaries
The fourth Social Security change offered by Biden is to gradually increase the primary insurance amount (PIA) for older Americans receiving a benefit. The PIA would be increased by 1% annually from ages 78 through 82, leading to an aggregate 5% PIA bump.
The reason for this proposed increase is to counter expenses that tend to grow as we age. For instance, medical care costs, such as medical transportation, prescription drugs, and/or personalized care, can grow a lot faster than Social Security benefits as a person ages. Increasing the PIA is designed to offset some of these rising expenses.
Image source: Getty Images.
Would Joe Biden's four-point Social Security plan take Social Security cuts off the table?
At first glance, this plan might sound like a win-win. It raises additional revenue for the program while lifting the benefits of those who need it most. But once you dig into the numbers, as Washington, D.C.-based think tank Urban Institute did, you'll see that Biden's four-point plan does very little to take Social Security benefit cuts off the table.
In October 2020, Urban Institute examined now-President Biden's Social Security proposals and determined that it "would close about a quarter of the program's long-term funding deficit and extend the life of the trust funds by about five years." Instead of the OASI exhausting its asset reserves by 2033, as the latest Trustees Report outlined, it would extend that depletion date to around 2038, if the findings of Urban Institute in 2020 prove accurate.
The glaring flaw with Joe Biden's Social Security plan is that he's repurposing a sizable percentage of the additional income collected by high-earning workers for other sources -- a higher special minimum benefit, PIA increases for aged beneficiaries, and a switch to the CPI-E that'll lead to higher COLAs for all. If the president simply made all earned income taxable and did nothing else, the Social Security Administration's Office of the Chief Actuary estimates the solvency of the trust funds would be extended by "about 35 years."
The key point being that no matter what President Biden proposes with regard to increasing payroll taxation on the rich, there appears to be no pathway to avoid future benefit cuts without taking other solutions into consideration. These alternative or additional solutions might include gradually increasing the payroll tax above 12.4%, as well as gradually lifting the full retirement age, which currently sits at 67 for those born in 1960 or later.
Another pitfall of the president's proposal is that he's going to have insufficient support in the upper house of Congress. It takes 60 votes to amend Social Security laws, and it's been 44 years (and counting) since either party held a supermajority of seats in the U.S. Senate. This means Social Security proposals will require bipartisan cooperation, and Republican senators have already declared their unwillingness to support changes that solely target high earners.
For the moment, sweeping Social Security benefit cuts remain very much on the table.
