In July, approximately 50 million retired workers received their monthly Social Security checks, which averaged $1,838.58 ($22,063 annually). While this income may seem modest, it is crucial for the majority of retirees. According to Gallup surveys spanning two decades, between 80% and 90% of retirees depend on their Social Security income to cover their expenses to varying degrees. Without this program, the poverty rate among seniors would be significantly higher.
Despite the importance of Social Security, the program’s foundation is beginning to crack. Fixing Social Security is a priority for the federal government. Before his election as president in 2020, Joe Biden revealed a plan to overhaul Social Security. His plan includes four core elements aimed at increasing taxation on high earners and enhancing benefits for those in need.
Joe Biden delivering remarks. Image source: Official White House Photo by Adam Schultz.
Social Security faces a funding shortfall of over $22 trillion.
For over 80 years, the Social Security Board of Trustees has released an annual report assessing the program’s financial health. The report analyzes both the short-term (10-year) and long-term (75-year) outlook, considering various economic, demographic, and fiscal changes. The 2023 report states that the program has a funding shortfall of $22.4 trillion through 2097. The Trustees believe that there will not be enough revenue to cover benefit outlays and administrative fees in the long term.
The report estimates that the Old-Age and Survivors Insurance Trust Fund (OASI), responsible for disbursing benefits to retired workers and survivors, will exhaust its reserves by 2033. Without further action, benefit cuts of up to 23% may be necessary after 2033 to maintain the program until 2097. The funding shortfall is primarily caused by demographic shifts and not Congress “stealing” Social Security’s reserves, as some myths suggest.
1. Reinstating the payroll tax on earned income above $400,000
One key aspect of Biden’s plan is to increase payroll taxation on high earners. Currently, all earned income between $0.01 and $160,200 is subject to the 12.4% payroll tax. Income above $160,200 is exempt. Biden proposes reinstating the tax on earnings above $400,000 and creating a “doughnut hole” between the maximum taxable earnings cap and $400,000. Over time, the doughnut hole would close, making all earned income subject to the tax.
2. Changing the inflationary measure to the CPI-E
Biden suggests replacing the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) with the Consumer Price Index for the Elderly (CPI-E) to calculate Social Security’s annual cost-of-living adjustment (COLA). The CPI-W doesn’t accurately represent the spending habits of Social Security beneficiaries, as it focuses on working-age Americans. The CPI-E solely considers households with individuals aged 62 and over, which could lead to higher COLAs.
3. Increasing the special minimum benefit to 125% of the federal poverty level
Biden aims to increase the special minimum benefit for low-earning workers with 30 years of coverage. Currently, these workers receive a benefit check of $1,033.50 per month, below the federal poverty limit for single filers. Biden’s plan would raise the special minimum benefit to 125% of the federal poverty level. This change would increase the benefit to $1,518.75 per month.
4. Gradually increasing the primary insurance amount for aged beneficiaries
Biden also proposes a gradual increase in the primary insurance amount (PIA) for aged beneficiaries. The PIA would rise by 1% annually, starting at age 78 and continuing through age 82, resulting in a 5% aggregate increase. This change is intended to offset higher expenses faced by aged beneficiaries, such as rising prescription drug and medical transportation costs.
Image source: Getty Images.
Studies reveal that Biden’s plan may not fully address Social Security’s challenges.
Several studies have examined the feasibility of Biden’s proposed changes to Social Security and found shortcomings. The Urban Institute, a Washington think tank, analyzed the impact of Biden’s plan and estimated that it would extend the program’s solvency by only about five years. The Social Security Administration’s Office of the Actuary also concluded that taxing high earners alone would only extend solvency by approximately 35 years.
Additionally, the non-partisan Penn Wharton Budget Model found unintended economic consequences associated with Biden’s proposals. Shifting to the CPI-E may lead individuals with ample savings to work less or retire earlier, potentially impacting U.S. productivity. Reinstating the payroll tax on high earners could distort labor supply decisions and adversely affect the economy.
While Joe Biden’s plan may delay the challenges facing Social Security, experts agree that it falls short of being a comprehensive solution. Addressing the long-term funding shortfall of the program requires careful consideration and potentially additional measures.
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The author’s views and opinions expressed in this article do not necessarily reflect those of Nasdaq, Inc.
