In July, nearly 50 million retired workers received checks from Social Security that averaged $1,838.58 (about $22,063 on an annualized basis). While this represents a fairly modest monthly payout, it's proven vital for the vast majority of retirees.
More than two decades worth of surveys from national pollster Gallup show that between 80% and 90% of retirees lean on their Social Security income to various degrees to cover their expenses. Without this program, the poverty rate for our nation's seniors would be significantly higher.
Yet in spite of Social Security playing a big role in the financial well-being of our nation's retired workers, the foundation of America's top retirement program has begun to crack. Fixing Social Security should therefore be a priority of the federal government.
Prior to being elected president in November 2020, then-candidate Joe Biden released a multipoint plan to overhaul Social Security. His plan contained four core elements designed to increase taxation on the highest earners and boost benefits for those who need it most.
Joe Biden delivering remarks. Image source: Official White House Photo by Adam Schultz.
Social Security's long-term funding shortfall tops $22 trillion
For more than eight decades, the Social Security Board of Trustees has been releasing an annual report that takes an under-the-hood look at the program's financial health. It examines both the short-term (10-year) outlook for Social Security, as well as the long-term (75-year) impact a variety of macroeconomic, demographic, and fiscal changes may have.
According to the 2023 Social Security Board of Trustees Report, the program is staring down a $22.4 trillion funding obligation shortfall through 2097. In simple terms, the Trustees believe there isn't enough revenue to be collected over the long-term to sufficiently cover benefit outlays and, to a far lesser extent, administrative fees.
More specifically, the Trustees Report estimates that the Old-Age and Survivors Insurance Trust Fund (OASI), which is responsible for doling out benefits to retired workers and survivors each month, is on track to exhaust its asset reserves by 2033. If the OASI's asset reserves were to run out, sweeping benefit cuts of up to 23% may be necessary to avoid any further payout reductions through 2097.
Although there are a number of myths that suggest Congress "stealing" Social Security's asset reserves are at fault, the reality is that a number of demographic shifts are to blame. These include:
- The steady and ongoing retirement of baby boomers, which is weighing on the worker-to-beneficiary ratio.
- Rising longevity -- the average U.S. life expectancy has increased 13 years since 1940, while the full retirement age has risen just two years (age 65 to 67) over the same span.
- A more-than-halving in net-legal immigration into the U.S. over the past 25 years.
- Growing income inequality, which is allowing more earned income (wages and salary, but not investment income) to "escape" being subjected to the 12.4% payroll tax.
- A sizable decline in U.S. birth rates, which threatens to further lower the worker-to-beneficiary ratio.
1. Reinstate the payroll tax on earned income above $400,000
The headline change of Biden's four-point proposal is to increase payroll taxation on the rich.
In 2023, all earned income between $0.01 and $160,200 is subject to the 12.4% payroll tax. Meanwhile, earned income above $160,200 (this upper bound is known as the maximum taxable earnings cap) is exempt from the payroll tax. Approximately 94% of working Americans pay into Social Security on every dollar they earn.
Biden's plan calls for the reinstatement of the payroll tax on earned income above $400,000, as well as the creation of a doughnut hole between the maximum taxable earnings cap and $400,000 where earned income would remain exempt. The key here is that the maximum taxable earnings cap increases in lockstep with the National Average Wage Index over time. In other words, this doughnut hole would eventually close after a few decades, making all earned income subject to the payroll tax.
2. Switch the inflationary measure to the CPI-E
Another big change offered by Joe Biden is to replace Social Security's measure of inflation.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been responsible for determining the program's annual cost-of-living adjustment (COLA). The problem with the CPI-W can be seen in its name. Tracking the spending habits of "urban wage earners and clerical workers" doesn't make much sense when these are typically working-age Americans who aren't currently receiving a Social Security benefit.
Biden has proposed switching to the Consumer Price Index for the Elderly (CPI-E), which would solely focus on the spending habits of households with persons aged 62 and over. Such a move should lead to higher annual COLAs.
3. Increase the special minimum benefit to 125% of the federal poverty level
Joe Biden's third key Social Security change is to increase the special minimum benefit for lifetime low earners.
In 2023, a lifetime low-earning worker with 30 years of coverage can do no better than a $1,033.50 benefit check each month. That's below the federal poverty limit of $1,215 per month for a single filer this year. Under Biden's plan, the special minimum benefit would be boosted to 125% of the federal poverty level.
If this were law right now, the special minimum benefit for 30 years of coverage would be $1,518.75 per month.
4. Provide a lift to aged beneficiaries via gradual PIA increases
Finally, Biden has called for a gradual increase to the primary insurance amount (PIA) for aged beneficiaries. Under his proposal, the PIA would increase by 1% annually, beginning at age 78 and continuing through age 82, for an aggregate increase of 5%.
The reason for the proposed increase in PIA is to partially offset some of the higher expenses aged beneficiaries contend with, such as rising prescription drug costs and/or medical transportation costs.
Image source: Getty Images.
Studies show that Joe Biden's Social Security changes come up short
If implemented, would Joe Biden's Social Security plan work?
Based on a number of studies that have examined his solutions, it would appear Biden's Social Security changes seem unrealistic.
In October 2020, a trio of researchers at Urban Institute, a Washington, D.C.-based think tank, comprehensively examined the impact Biden's proposals would have on the program. The end result of Urban Institute's analysis was that Biden's plan would extend the solvency of the program's asset reserves by "about five years."
Separately, an analysis from the Social Security Administration's Office of the Actuary in December 2021 determined that if all earned income were subject to the payroll tax and no other changes were implemented, the solvency of the program's asset reserves would be extended by "about 35 years."
These two analyses show that taxing the rich, by itself, doesn't come close to covering Social Security's long-term funding obligation shortfall. Furthermore, it demonstrates that Biden's other proposals designed to boost benefits (e.g., shifting to the CPI-E, increasing the special minimum benefit, and lifting the PIA for aged beneficiaries) would offset virtually all of the revenue gained from increasing payroll taxation on high earners.
But wait -- there's more.
Economists at the non-partisan Penn Wharton Budget Model (PWBM) examined Joe Biden's Social Security plan as well. While their March 2020 analysis did show that the long-term actuarial deficit for the Old-Age, Survivors, and Disability Insurance Trust Funds (OASDI) would decline from 3.55% of taxable payroll to an estimated 2.01% of taxable payroll, PWBM's researchers also found unintended economic consequences associated with Biden's proposal.
For example, PWBM economists found that shifting to the CPI-E from the CPI-W would encourage those with ample savings to either work less or retire earlier. Fewer hours worked would be expected to have a negative long-term impact on U.S. productivity.
Likewise, PWBM economists believe reinstating the payroll tax on high earners would "distort labor supply decisions by more than the current payroll tax." In plain English, since these changes wouldn't result in any added benefits for high earners, they'd alter their income streams to owe less. This could mean fewer hours worked, deferring some of their income, or possibly generating their income from small businesses, which may not be subject to the payroll tax. This would also hurt the U.S. economy.
Something needs to be done to shore up Social Security for current and future retirees. While Joe Biden's plan would seemingly delay the inevitable for a few years, it's far from a full-fledged solution.
