Whether you’re new to the job market or have been retired for years, chances are you’ll rely on Social Security income, to varying degrees, to make ends meet for your years. golden.
Earlier this year, national pollster Gallup found that 89% of retirees currently rely on Social Security as either a “major” or “minor” source of income. Meanwhile, 84% of non-retirees expect to need their Retired Workers Allowance to help pay their bills when they finally hang up their work coat. In other words, Social Security is vital to the financial well-being of most Americans.
Unfortunately, this pivotal program is on shaky ground.
Social Security faces a long-term cash shortfall of more than $20 trillion
Social Security has absolutely no risk of going bankrupt or becoming insolvent. If you have earned the 40 lifetime work credits required to receive a retired worker’s benefit, you will receive a monthly payment when you qualify. Since Social Security is primarily funded by the payroll tax, it cannot go bankrupt as long as people continue to work and pay their taxes.
However, the latest report from the Social Security Board of Directors implies that deep cuts in benefits are not too far away if program shortcomings are not addressed.
For example, the trustees’ report highlighted a combined Old Age and Survivors’ Insurance (OASI) and Disability Insurance (DI) funding shortfall of $20.4 trillion over the past 75 coming years. This shortfall is due to a long list of factors, including the retirement of baby boomers, increased longevity, lower legal immigration, historically low birth rates in the United States, and an abundance of others. macroeconomic changes.
If lawmakers fail to address these issues, the report predicts that a reduction of up to 23% in monthly benefits will become necessary so that the AVS by 2034 can maintain payments until 2096 without any further reduction. . The AVS is responsible for distributing benefit checks to 47.9 million retirees each month.
And that’s not the only problem. Since 2000, the purchasing power of Social Security income has fallen by 40%, according to an analysis by a nonpartisan senior advocacy group, The Senior Citizens League. The problem is that Social Security’s annual cost-of-living adjustment (COLA), and ultimately the inflationary nexus that dictates the amount of benefits to increase over the coming year, does not properly account for the inflation faced by older people.
A look back at the four changes Joe Biden wants to make to Social Security
Social Security desperately needs the attention of lawmakers, and that was a promise made by President Joe Biden during his campaign before winning the presidency. Before taking office, Biden outlined four changes he wanted to see made to Social Security that would generate additional revenue and funnel larger payments to those who needed them most.
1. Increase taxation on the salaries of the wealthiest
Arguably the most popular change proposed by current President Joe Biden is that the wealthy pay more into the system.
In 2022, all earned income (wages and salaries but not investment income) between $0.01 and $147,000 is subject to the 12.4% payroll tax. About 94% of American workers pay this tax on every dollar they earn. But for high earners, wages and salaries over $147,000 are exempt from payroll tax. We’re talking about over $1 trillion in revenue earned avoiding payroll taxes every year.
Biden’s plan is simple: Create a donut hole between the current payroll tax cap ($147,000) and $400,000 where earned income would remain exempt. For wages and salaries over $400,000, the 12.4% payroll tax would come back into effect. This should allow Social Security to collect additional revenue each year. Also, with the payroll tax cap increasing most years, this donut hole should eventually close over time.
2. Increase benefits for long-term beneficiaries
The second change proposed by Biden was to increase the primary insurance amount (PIA) distributed to elderly beneficiaries. The reason for this change is that as people age, some of their expenses, such as medical transportation costs, can increase much faster than the COLA attached to their Social Security benefit.
Biden outlined a plan to increase the PIA by 1% per year from ages 78 to 82 until older beneficiaries receive a cumulative increase of 5%.
3. Lift the special minimum benefit
A third Social Security change Biden proposed during his campaign was to improve the Special Minimum Benefit.
In 2022, a lifetime low-income person with 30 years of coverage could receive a monthly benefit of nearly $951. The problem is, that’s nowhere near the federal poverty line (for an individual) of $1,132.50/month, in 2022.
Biden’s proposal suggests raising the Social Security special minimum benefit to 125% of the federal poverty level. Instead of $951, a lifetime low-income worker with 30 years of coverage could receive nearly $1,416 a month under Biden’s plan in 2022.
4. Change the inflationary link from CPI-W to CPI-E
The fourth and final Social Security change that Joe Biden wants to make is to shift the program from its ineffective inflationary tie, the Consumer Price Index for Urban and Office Workers (CPI-W), to the consumer price index for the elderly (CPI-E).
As noted, the CPI-W failed to account for the inflation that older people face, resulting in a 40% loss in purchasing power this century. Since the vast majority of Social Security recipients are elderly, the use of an index that focuses only on expenditures important to older Americans (i.e. CPI-E) should lead to more accurate COLAs on an annual basis.
Joe Biden’s Social Security proposals are unlikely to become law
President Biden unveiled his Social Security proposals more than two years ago. Although his party narrowly took control of Congress, no progress has been made to address the many issues plaguing Social Security or advance Biden’s approach.
The biggest hurdle Congress faces when it comes to “fixing” Social Security is that finding common ground is nearly impossible. For example, even though Democrats and Republicans agree that the CPI-W does a poor job of addressing the inflation that seniors face, both parties have approached their solutions from opposite ends of the spectrum. Since both proposals would get the job done, neither side feels the need to give an inch and find common ground with their opposition.
If there’s a silver lining here, it’s that lawmakers have a habit of coming to the aid of Social Security during the 11th hour. In 1983, with the program less than a year away from depleting its reserves of assets (i.e. excess revenue accumulated since its inception), President Ronald Reagan and Congress passed an overhaul bipartisan social security. The 1983 amendments included fundamental proposals from both political parties.
The other problem President Biden would face is getting the 60 votes required in the US Senate to pass any Social Security reform. Even if the Senate were controlled by Democrats, passing Biden’s Social Security program would likely require some Republican support. It has been more than four decades since either party held a supermajority (60 votes or more) in the US Senate.
For now, the stark reality is that President Biden’s Social Security proposals, and all other proposals from both parties, for that matter, are not gaining traction in Congress.