For many of America's current and future retirees, Social Security income is indispensable. More than two decades' worth of annual surveys from national pollster Gallup have shown that between 80% and 90% of retirees rely on their monthly Social Security check to cover at least a portion of their expenses.
Ensuring that Social Security's foundation is strong is paramount to the financial well-being of our nation's retired workforce. However, this foundation has begun to crack.
America's top retirement program is in need of reform, and that all starts with lawmakers in Congress and 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 long-term funding deficit
If there's a silver lining for Social Security and its many generations of future beneficiaries, it's that the program won't be insolvent or go bankrupt. Approximately 90% of the program's revenue derives from the 12.4% payroll tax on earned income (wages and salary but not investment income). As long as Americans keep working and paying their taxes, money will continue to be collected for distribution to eligible beneficiaries.
What isn't sustainable is the current payment schedule, including annual cost-of-living adjustments (COLAs). According to the 2023 Social Security Board of Trustees Report, the program is contending with an estimated funding shortfall of $22.4 trillion through 2097.
More specifically, the Trustees foresee the asset reserves -- effectively, the extra revenue collected that hasn't been paid out in benefits since inception -- of the Old-Age and Survivors Insurance Trust Fund (OASI) being exhausted by 2033. If and when the OASI's asset reserves are depleted, sweeping benefit cuts of up to 23% may be needed for retired workers and survivor beneficiaries to avoid any further reductions through 2097.
There isn't one particular factor that can be blamed for the predicament America's top retirement program is in. Rather, it's a confluence of factors that includes:
- The ongoing retirement of baby boomers.
- A meaningful increase in longevity since Social Security's first retired-worker payout in January 1940.
- Increasing income inequality.
- A historic decline in U.S. birth rates.
- A more-than-halving in legal immigration into the U.S. over the past 25 years.
To "fix" Social Security, one or more of the above issues needs to be addressed. President Biden believes he has the solution.
President Biden's four-point Social Security plan seeks to boost revenue and benefits
Prior to being elected president in November 2020, then-candidate Joe Biden released a four-point plan to change Social Security. Biden's proposal seeks to meaningfully increase revenue for the program while beefing up benefits for every beneficiary.
1. Reinstate the 12.4% payroll tax on high earners
The flagship change of Biden's Social Security plan would see the 12.4% payroll tax on earned income reinstated for high earners.
This year, all earned income between $0.01 and $160,200 is subject to the payroll tax. Approximately 94% of working Americans won't reach $160,200 in earnings, which means they're paying into Social Security with every dollar they earn. Meanwhile, workers who surpass $160,200 in earned income won't owe any payroll tax above this maximum taxable earnings cap.
Under Biden's proposal, the payroll tax would be reinstated at $400,000, with a doughnut hole created between the maximum taxable earnings cap ($160,200 in 2023) and $400,000 where earned income would remain exempt. Since the maximum taxable earnings cap increases in lockstep with the National Average Wage Index most years, this doughnut hole would gradually close over time, thereby exposing all earned income to the payroll tax.
2. Change Social Security's inflationary tether to the CPI-E from CPI-W
Since 1975, Social Security's annual cost-of-living adjustments have been calculated by measuring changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Unfortunately, this inflation-focused index has done a poor job of tracking what matters to the 86% of existing beneficiaries aged 62 and above.
As you can see from its full name, the CPI-W is tracking the spending habits of "urban wage earners and clerical workers." In other words, people who aren't likely to be seniors and/or receiving a Social Security benefit. As a result, the purchasing power of a Social Security dollar has plummeted by 36% since January 2000.
On the other hand, the Consumer Price Index for the Elderly (CPI-E) solely focuses on the spending habits of households with persons aged 62 and above. The end result should be higher annual COLAs over time for all beneficiaries.
3. Lift the special minimum benefit above the poverty level
Lifetime low-earning workers with at least 30 years of coverage are only receiving a maximum monthly Social Security check of $1,033.50 in 2023. For context, that's about 15% below the federal poverty level for a single filer of $1,215/month this year.
Under Biden's proposal, the special minimum benefit for lifetime low-earners would be increased to 125% of the federal poverty level and adjusted in subsequent years. If Biden's four-point plan were law right now, this same lifetime low earner would be bringing home $1,518.75 per month, or $5,823 more for the year.
4. Gradually increase the primary insurance amount (PIA) for aged beneficiaries
The fourth and final Social Security change offered by Biden is the gradual increase to the primary insurance amount (PIA) for aged beneficiaries. The PIA would increase by 1% annually, beginning at age 78 and continuing through age 82, for a cumulative 5% lift.
As we age, certain expenses can increase, such as the cost for prescription drugs and medical transportation. Gradually increasing the PIA for aged beneficiaries would be a means to partially offset some of these higher later-in-life expenses.
Image source: Getty Images.
Biden's Social Security plan has three fatal flaws
On the surface, Biden's proposal would appear to meet its initial goal of raising additional revenue for Social Security by increasing taxation on the rich, as well as lifting benefits for those who need it most. But dig deeper and you'll find three fatal flaws with Biden's Social Security plan.
The first weakness with the president's Social Security proposal is that taxing the rich would have unintended consequences that adversely impact revenue collection and economic growth.
In March 2020, the economists at the Penn Wharton Budget Model (PWBM) analyzed the fiscal impact Biden's multitude of proposals would have on economic growth. What PWBM's researchers noted was that high earners would either opt to work less, defer their income, or potentially alter how they receive income in order to avoid having to pay extra payroll tax.
To add to the above, switching to the CPI-E would gradually increase COLAs for all workers, including high earners. This could mean fewer hours worked or earlier retirement for those with ample savings, which would be a net negative for the U.S. economy.
The second fatal flaw in Joe Biden's Social Security plan is that it fails to meaningfully move the needle.
In October 2020, researchers at the Urban Institute examined Biden's proposals and calculated that they 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." Despite an immediate infusion of revenue by taxing the rich, Biden's other proposals (switching to the CPI-E, increasing the special minimum benefit, and gradually increasing the PIA) would offset most of this gain.
To be clear, Biden's plan does, indeed, extend the solvency of Social Security's asset reserves from where estimates stand now. However, it doesn't come close to addressing the long-term funding shortfall.
The third fatal flaw of Joe Biden's four-point plan to change Social Security is that he doesn't have the support in Congress to pass meaningful reform.
To amend Social Security laws, 60 votes are required in the Senate. The last time either party had a supermajority of 60 seats in the upper house of Congress was 1979. This means any changes to America's top retirement program will require some form of bipartisan support. Republicans have been clear that they won't vote in favor of a plan that targets high-earning Americans. Meanwhile, Democrats plan to vote against any reforms that would reduce benefits, such as gradually raising the full retirement age.
With both parties at a stalemate, Joe Biden's Social Security plan is unlikely to become law.
