In June, more than 49 million retired workers took home a Social Security check. Although the average payout to these retirees totaled just $1,837.29, more than 20 years of annual surveys have shown that between 80% and 90% of retired workers lean on their Social Security income, to some degree, to cover their expenses.
Considering how vital Social Security is to the financial well-being of our nation's seniors, sustaining the health of the program is of the utmost importance. Unfortunately, the foundation that supports America's top retirement program is deteriorating and at risk of crumbling without changes from Washington, D.C.
With Social Security on shaky ground, Americans are looking to Capitol Hill for solutions, and that generally starts with the President of the United States, Joe Biden.
Social Security is facing a $22.4 trillion long-term funding obligation shortfall
To make one thing clear, Social Security is in absolutely no danger of going bankrupt or becoming insolvent.
The program generated 90% of its revenue in 2022 from the payroll tax on earned income (wages and salary, but not investment income), and an additional 4% from the taxation of Social Security benefits. As long as Americans keep working and paying their taxes, there will always be money flowing into the program that can be disbursed to eligible beneficiaries. In other words, if you qualify for a Social Security benefit, you're going to receive one, when eligible.
The issue is that Social Security's projected outlays, as outlined in the 2023 Social Security Board of Trustees Report, are vastly outpacing estimated revenue collection over the long term (i.e., the 75 years following the release of a report). Through 2097, the Trustees Report estimates a $22.4 trillion funding obligation shortfall.
According to the Trustees Report, if the asset reserves (excess capital collected since inception) of the Old-Age and Survivors Insurance Trust Fund (OASI) were to be exhausted, sweeping benefit cuts of up to 23% may be needed by as early as 2033 to avoid any additional benefit reductions over the long term. Once again, it's not an issue of solvency so much as avoiding a possible 23% reduction to Social Security benefits for OASI recipients in the not-too-distant future.
If you're wondering why Social Security finds itself on such shaky ground, look no further than an assortment of demographic shifts. Some of these shifts you're probably familiar with, such as baby boomers retiring in greater numbers and reducing the worker-to-beneficiary ratio. Others might come as a surprise, such as growing income inequality, historically low U.S. birth rates, and a more-than-halving in legal immigration into the U.S. over the past 25 years.
Joe Biden wants to make four key changes to Social Security
Social Security's deepening financial woes aren't lost on lawmakers. During his campaign for the presidency, then-candidate Joe Biden released a four-point plan designed to strengthen America's leading retirement program.
1. Reinstate the payroll tax on earned income above $400,000
The linchpin to Biden's Social Security plan is to reinstate the 12.4% payroll tax on the earned income of high earners.
In 2023, earned income between $0.01 and $160,200 is subject to Social Security's payroll tax. Approximately 94% of workers generate annual earned income below the maximum taxable earnings cap (the $160,200 figure), and therefore pay into Social Security with every dollar they earn. Meanwhile, earned income above $160,200 is exempt from the payroll tax.
Under Biden's proposal, the payroll tax would be reinstated on earned income above $400,000, with a doughnut hole created between the maximum taxable earnings cap and $400,000 where earned income would remain exempt. Since the maximum taxable earnings cap rises most years in line with the National Average Wage Index, this doughnut hole would be expected to close after numerous decades. Biden's plan would, in time, make all earned income applicable to the payroll tax.
2. Swap out the CPI-W with the CPI-E
The second big change would see the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) replaced by the Consumer Price Index for the Elderly (CPI-E).
The CPI-W has been Social Security's measure of inflation since 1975 and is used to determine annual cost-of-living adjustments (COLAs). The problem is that the CPI-W tracks the spending habits of "urban wage earners and clerical workers," who are typically not seniors and not receiving a Social Security benefit.
As the CPI-E's full name implies, it tracks the spending habits of households with seniors aged 62 and above. Since well over 80% of Social Security beneficiaries are aged 62 and over, it makes sense to utilize an index that tracks their spending habits. Switching to the CPI-E should result in higher annual COLAs for all beneficiaries.
3. Increase the special minimum benefit
Joe Biden also proposed increasing the special minimum benefit for lifetime low-earning workers. In 2023, a lifetime low-earning worker with 30 years of coverage will max out with a monthly benefit of $1,033.50. That's below the poverty level for a single filer of $1,215 per month.
Biden's simple solution would be to raise the special minimum benefit to 125% of the federal poverty level for a single filer. If this proposal were, hypothetically, law today, the special minimum benefit would be $1,518.75 per month in 2023 instead of $1,033.50.
4. Lift the primary insurance amount for aged beneficiaries
The fourth big Social Security change proposed by then-candidate Joe Biden was to gradually increase the primary insurance amount (PIA) for older Americans receiving Social Security.
The way it would work is the PIA would rise by 1% annually, beginning at age 78 and continuing through age 82. This aggregate 5% increase in the PIA is designed to help aged beneficiaries somewhat offset higher expenses as they age, such as prescription medicines and/or medical transportation costs.
After running the math, here's how Biden's Social Security plan scored
The trillion-dollar question is: Would Joe Biden's four-point plan actually work to resolve Social Security's massive funding shortfall?
This is the question Washington, D.C.-based think tank Urban Institute tackled in 2020 when they painstakingly modeled all of Biden's proposals. Keep in mind that when Urban Institute conducted its study, it was utilizing funding shortfall figures from the 2020 Social Security Trustees Report, and that none of its assumptions included any economic impacts from the COVID-19 pandemic.
At the time of the study, Social Security was facing a 75-year financial funding shortfall that equated to 2.59% of taxable payroll. Urban Institute found that increasing taxation on the rich reduced this long-term deficit by 1.84% of taxable payroll. In other words, subjecting all earned income above $400,000 to the payroll tax, as of 2020, eliminated 71% of Social Security's funding shortfall.
But then Urban Institute examined the myriad of other changes Biden proposed, such as shifting to the CPI-E, which would increase COLAs for all, raising the special minimum benefit, and lifting the PIA for older beneficiaries. Once the added revenue from taxing high earners was reapportioned, the benefit of Joe Biden's proposal was far more modest.
As of 2020, Urban Institute estimated a reduction in the long-term deficit of only 0.68% of taxable payroll. In easier-to-understand terms, Biden's full proposal would be expected to extend the solvency of the asset reserves by about five years. If we make the assumption that the Urban Institute's analysis in 2020 would still hold true in 2023, we're talking about the OASI's asset reserves running dry by 2038 instead of 2033.
After running the math, it's clear that Biden's four-point Social Security plan would give the program some extra breathing room, but it would do little to resolve the $22.4 trillion (and growing) long-term funding obligation shortfall.