For most Americans, Social Security income is or will be critical to their financial well-being in retirement. More than 20 years of annual research by the national polling firm Gallup found that 80% to 90% of retirees at the time relied on their monthly Social Security checks to get by.
America’s top retirement programs also help lift more than 21 million people out of poverty each year, including approximately 15.4 million adults age 65 and older. It is truly an essential source of income.
However, the foundations of this important program are beginning to show cracks. Lawmakers need to act to strengthen Social Security for existing beneficiaries and future generations of Americans. And it all starts with President Joe Biden.
![Joe Biden listens intently to former President Barack Obama's speech.](https://g.foolcdn.com/image/?url=https%3A%2F%2Fg.foolcdn.com%2Feditorial%2Fimages%2F757979%2Fjoe-biden-listens-to-barack-obama-official-wh-photo-pete-souza.jpg&op=resize&w=700)
Joe Biden listens to former President Barack Obama. Image source: Official White House photo by Pete Souza.
Social Security has a $22 trillion (and growing) problem.
Each year since payments to Social Security retired workers began in January 1940, the program’s board of directors has released a lengthy report detailing the program’s current financial status. The Trustees report also estimates Social Security’s future financial health, taking into account a number of variables, including fiscal and monetary policy and demographic changes.
Since 1985, the Trustees have opined that America’s top retirement systems are not adequately funded to cover their long-term obligations (i.e., all payments, including benefits and administrative expenses). . By “long term” we mean his 75 years since the Trustees published the report. As of the 2023 report, the Trustees estimate Social Security’s unfunded long-term debt at $22.4 trillion.
To be clear, Social Security is in no danger of becoming bankrupt or insolvent. The program derives approximately 90% of its annual revenue from payroll taxes on earned income (wages and salaries). As long as Americans continue to work and pay taxes, Social Security will receive income that will be paid out to eligible beneficiaries.
At issue is how much current and/or future beneficiaries will receive. The Old Age and Survivors Insurance Trust Fund (OASI), which is responsible for paying benefits to approximately 50 million retired workers and 5.8 million survivor beneficiaries each month, will lose its assets by 2033, according to the trustees. It is possible that reserves could be depleted. Reserves are depleted and significant benefit cuts of up to 23% may be required to maintain benefits through 2097.
The primary cause of Social Security’s $22 trillion (and growing) deficit is ongoing demographic change. These include a halving of legal immigration to the United States over the past quarter century, widening income inequality, and historically low birth rates.
Strengthening the Social Security program will require lawmakers to address at least one flaw in Social Security, and President Biden believes he has a solution.
Biden has four proposals to strengthen Social Security.
Ahead of the November 2020 presidential election, then-candidate Joe Biden released a proposal detailing four ways to strengthen Social Security.
1. Increase the payroll tax burden for high-income earners
Key reforms proposed by Biden include increasing the payroll tax burden for high-income workers.
In 2024, all earned income between $0.01 and $168,600 will be subject to a 12.4% payroll tax. About 94% of working Americans will have a household take-home pay of less than $168,600 next year, meaning they will pay into Social Security every dollar they earn. On the other hand, wages and salaries over $168,600 are exempt from payroll taxes.
Biden’s plan would reintroduce a 12.4% payroll tax on earned income at $400,000, while also increasing the gap between the taxable income cap (a figure of $168,600) and the $400,000 for which earned income would still be exempt. This results in a donut hole. This donut hole will eventually close over time, as the taxable income cap increases each year to match the national average wage index. In other words, in a few decades, all wages and salaries will be subject to payroll taxes.
2. Shift the program’s inflation measure from CPI-W to CPI-E
The second major change proposed by President Biden would eliminate the Consumer Price Index for Urban Wage and Office Workers (CPI-W) in favor of the Consumer Price Index for Seniors (CPI-E). That’s true.
Since 1975, the CPI-W has been Social Security’s inflationary nexus. This means that the measurement is used to calculate the program’s annual cost of living adjustment (COLA).
The problem is that, as its official name suggests, the CPI-W is an inflation index that focuses primarily on working-age Americans, who spend their money differently than older adults. Expenditures important to older Americans, such as health care and shelter, are not given adequate weight in the CPI-W, resulting in a 36% decline in purchasing power since January 2000.
CPI-E is an inflation index that focuses on households with people age 62 and older. Since 86% of Social Security recipients are over the age of 62, CPI-E should yield a more accurate (and higher) annual COLA.
3. Increase in principal insurance amount for elderly beneficiaries
Joe Biden also proposes a gradual increase in the primary insured amount (PIA) for older beneficiaries. Specifically, under Biden’s plan, PIA for retired workers would increase by 1% each year from age 78 to age 82, for a total increase of 5%.
Increasing PIA for older Americans would be a way to offset some of the high costs they often face later in life, such as prescription drugs and medical transportation.
4. Raise the special minimum benefit above the poverty level
The fourth and final change proposed by President Biden is an increase in special minimum benefits.
In 2023, a lifetime low-income person with a 30-year policy will receive only $1,033.50 per month. This is well below the federal poverty level for single filers of $1,215 per month.
Under Mr. Biden’s plan, special minimum benefits for eligible workers would increase to 125% of the federal poverty level and be adjusted annually thereafter. If Biden’s four-point plan were the law as it stands now, the special minimum benefit would increase to $1,518.75 this year.
![Two Social Security cards and two $100 bills placed on top of a payment schedule sheet.](https://g.foolcdn.com/image/?url=https%3A%2F%2Fg.foolcdn.com%2Feditorial%2Fimages%2F757979%2Fsocial-security-benefits-card-calculation-getty.jpg&op=resize&w=700)
Image source: Getty Images.
Will 2024 be the year Biden’s four-point Social Security plan becomes law?
But the most important question is: Will 2024 be the year that Joe Biden and Congress come together to turn the president’s proposals into law? The answer is a resounding “no” for a variety of reasons.
The first thing is clear: President Biden does not have the votes needed to pass his proposal through Congress. Republicans currently hold a slim majority in the House of Representatives, and Republican lawmakers have made clear they do not support legislation targeting high-income Americans.
Additionally, any amendment to the Social Security Act would require 60 votes in the Senate. It has been 44 years since either party won a supermajority of 60 seats in the upper house of Congress. This means any bill that changes Social Security would need some kind of bipartisan support. There are few issues on which Democrats and Republicans are more at odds than Social Security.
I would be remiss if I didn’t also mention that 2024 is a big election year. Neither party is likely to tackle a sensitive topic like Social Security for fear of upsetting undecided voters.
Another big problem with Joe Biden’s Social Security plan is that the math doesn’t add up. In October 2020, the Urban Institute, a nonpartisan think tank, published an analysis of then-candidate Biden’s Social Security proposal, which found it would “eliminate about a quarter of the program’s long-term funding gap and free up the trust fund.” The decision was made that it would only extend the lifespan by about five years. . ”
Taxing the wealthy would immediately raise additional revenue for Social Security, but Biden’s other proposals — increasing PIA for older beneficiaries, increasing special minimum benefits to 125% of the federal poverty level, increasing COLA It will be phased in across the board along with the CPI-E — which will offset much of this additional revenue.
So there are too many headwinds to suggest that Joe Biden’s four-point Social Security plan has a real chance of being implemented in 2024.