President Joe Biden’s proposal to strengthen Social Security falls short of making a significant impact. Despite the average monthly benefit of $1,835 for retired workers, which serves as a crucial income source for most seniors, the president’s plan fails to address the underlying issues.
For over two decades, Gallup has conducted polls asking retirees about their dependence on Social Security. Consistently, at least 80% of respondents have acknowledged relying on their monthly benefits to some extent. This highlights the critical importance of ensuring the long-term financial stability of America’s most successful retirement program.
Unfortunately, Social Security is facing a daunting financial crisis, and the public looks to Washington, D.C., for solutions. The pressing question is whether President Biden and other lawmakers have the necessary answers.
The Enormous Financial Challenge of Social Security
To understand why Social Security is in financial jeopardy, it is essential to delve into the reasons behind its current state. Since 1940, the Social Security Board of Trustees has published annual reports assessing the program’s financial health over the short term (10 years) and long term (75 years). Since 1985, these reports have consistently warned that incoming revenue would be insufficient to cover projected benefits and administrative expenses over the subsequent 75 years.
According to the 2023 report, Social Security faces a long-term funding shortfall of $22.4 trillion, which is $2 trillion more than projected in the 2022 report. This indicates that the longer lawmakers delay action, the larger the funding deficit.
The Trustees Report also predicts that if the program’s shortcomings are not addressed, the more than $2.8 trillion in asset reserves could be depleted within a decade for the Old Age and Survivors Insurance Trust (OASI). In such a scenario, drastic cuts of up to 23% may be necessary to sustain payouts for retired workers and survivors until 2097 without further reductions.
Several demographic changes contribute to the financial challenges faced by Social Security. These include a significant decline in legal immigration, historically low birth rates, growing income inequality, increased life expectancy, and the baby boomer generation’s retirement.
Joe Biden’s Four-Point Plan to Strengthen Social Security
Before assuming the presidency, Joe Biden unveiled a four-point plan to bolster Social Security. The proposal suggests generating more revenue by increasing taxes on individuals with high incomes and using some of those funds to address areas that are believed to be lacking.
Reinstating the Payroll Tax on High Earners: Biden’s key proposal involves reinstating the 12.4% payroll tax on earned income exceeding $400,000. Currently, this tax is shared equally between employers and employees, with the self-employed responsible for the entire amount. Individuals earning less than $160,200 per year pay the payroll tax on their entire income, while those above that threshold are exempt from the taxes on the additional amount. Biden’s plan introduces a “doughnut hole” where earned income between the maximum taxable earnings cap and $400,000 remains exempt, while income exceeding $400,000 would be fully subjected to the payroll tax.
Switching from CPI-W to CPI-E: Biden’s proposal for calculating inflation for Social Security involves switching the CPI-W for the CPI-E. The CPI-W determines annual cost-of-living adjustments (COLA) for beneficiaries but does not accurately reflect the inflation experienced by seniors, who make up the majority of Social Security recipients. The CPI-E, focusing exclusively on households with individuals aged 62 and over, aims to provide a more precise and higher COLA.
Strengthening the Special Minimum Benefit: Social Security already includes a special minimum monthly benefit for low-earning workers. Biden’s plan proposes increasing this benefit to 125% of the federal poverty level for single filers annually. In 2023, this would raise the minimum payout to $1,518.75 per month, which is still below the federal poverty level.
Gradually Increasing Payouts for Aged Beneficiaries: Biden’s final proposal entails a 1% annual increase in the primary insurance amount (PIA) for aged beneficiaries. This increase would start at age 78 and continue until age 82, resulting in a cumulative 5% raise. The intention is to counterbalance the higher costs faced by older individuals as they age, including expenses related to prescription drugs, medical visits, and transportation to healthcare providers.
The Stark Reality of Biden’s Social Security Proposal
Although these proposals may sound appealing in theory, the harsh reality is that Biden’s plan does very little to extend the solvency of Social Security’s asset reserves. Approximately five years would be added to the trust fund’s life under Biden’s four-point plan, according to the Urban Institute. If Biden solely focused on increasing taxes for high earners without implementing other changes, the solvency issue would be postponed significantly. According to the Social Security Administration’s Office of the Chief Actuary, the payroll tax could extend the trust funds’ solvency by about 35 years. However, Biden’s additional proposals, such as boosting COLAs, increasing the special minimum benefit, and raising the PIA for aged beneficiaries, negate much of the revenue gains from taxing the wealthy.
The analysis from the Office of the Chief Actuary makes it clear that taxing high earners alone is insufficient to solve the problem. Although it would delay the issue, additional measures such as increasing the payroll tax beyond 12.4% or raising the full retirement age would need to be considered to address Social Security’s growing funding deficit, currently amounting to $22.4 trillion.