The president’s proposition to reinforce Government social security wouldn’t do a lot to make at least some difference.
As of April 2023, most seniors rely on their monthly Social Security benefits, which is only $1,835 on average for retired workers. Despite this, the benefit is still an essential source of income.
National pollster Gallup has asked a variety of senior citizens how dependent they are on their monthly Social Security check for the past 22 years.
Over the course of the 22 years, at least 80% of retirees have stated that they depend on their payout as either a “major” or “minor” source of income. To put it another way, guaranteeing that America’s most successful retirement program continues to operate on sound financial foundations is of the utmost significance.
Unfortunately, the public in the United States is looking to Washington, D.C., for a solution to the crumbling financial foundation of Social Security. The major inquiry is: Do lawmakers, starting with President Joe Biden, possess the solutions?
Before being elected president in November 2020, then-candidate Joe Biden released a four-point plan to strengthen America’s top retirement program. This plan was aimed at strengthening Social Security.
By raising taxes on high earners, Biden’s plan hopes to raise a lot of money and would redistribute some of that money to fix other perceived problems.
1. Reinstate the payroll tax on high earners
The primary component of Biden’s proposal for Social Security would be to reintroduce the 12.4% payroll tax on earned income (wages and salary, but not investment income) over $400,000. This tax is split equally between you and your employer if you work for someone else (6.2% each). In contrast, you are responsible for paying 12.4% payroll tax if you are self-employed.
The payroll tax will apply to all earned income between $0.01 and $160,200 in 2023. Since 94% of employed Americans earn less than $160,200 annually, they contribute every penny to Social Security. Earnings over $160,200 are exempt from the payroll tax for the remaining 6%.
Biden proposed creating a doughnut hole in the payroll tax exemption for earned income between the maximum taxable earnings cap (in 2023, $160,200) and $400,000
Remember that the National Average Wage Index usually goes up with the maximum taxable payroll cap, so this donut hole would naturally close over many decades. In the meantime, all earned income in excess of $400,000 would be subject to the payroll tax.
2. Ditch the CPI-W in favor of the CPI-E
Biden’s proposal to change the Social Security program’s inflation measure from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E) is another significant change.
The measure used to calculate annual cost-of-living adjustments (COLA), or the “raises” that beneficiaries receive most of the time to account for inflation, is the CPI-W. The issue is that the CPI-W does not accurately reflect the inflation that most program recipients face. The CPI-W is tracking the spending habits of predominantly working-age Americans (urban wage earners and clerical workers) who are not receiving a Social Security benefit, even though seniors make up the majority of beneficiaries of the program.
As its name suggests, the CPI-E would only track the spending habits of households with people over 62, yielding a more accurate COLA each year.
3. Boost the special minimum benefit
Although it may go unnoticed, lifetime low-earning workers are eligible for a special minimum monthly benefit from Social Security. With 30 years of coverage, the special minimum benefit 2023 will be $1,033.50 monthly.
However, a monthly payment of $1,033.50 still falls far short of the federal poverty level for a single filer, which is $1,215 this year. The special minimum benefit for single filers under Biden’s plan would rise to 125% of the federal poverty level in a year. It would have increased this payment to $1,518.75 in 2023.
4. Lift payouts for aged beneficiaries
Biden’s fourth and final Social Security change calls for a gradual increase in the primary insurance amount (PIA) for older beneficiaries of 1 percent per year. This 1% annual increase in PIA would begin at age 78 and continue until age 82, or 5% overall.
The ‘why’ behind this rise is that older Americans face rising costs as they get older. Costs for prescription drugs, medical visits, and even transportation to the doctor’s office can all rise with age. The purpose of gradually increasing the PIA is to alleviate some of this increased expense.
The Grim Reality of Joe Biden’s Proposal for Social Security
Much like most proposals, everything on paper sounds great. Higher annual COLAs for all 66 million+ beneficiaries, an increase in the special minimum benefit for lifetime low earners, and higher payouts for retirees as they age would all be fueled by additional revenue from Social Security. However, Biden’s proposal has a grim reality that needs to be addressed.
An Urban Institute analysis of Biden’s proposal reveals that his four-point plan does very little to extend the solvency of the program’s asset reserves. While it is better to do something about Social Security’s long-term funding shortfall than to do nothing, remember that drastic benefits reductions are necessary to maintain payouts once asset reserves are exhausted.
Biden’s four-point plan would, in the words of the Urban Institute, “extend the life of the trust funds by about five years.”
The trust fund’s solvency issues would have been much further along if Biden had only proposed a tax increase for high earners and made no other changes to the program.
An estimation made by the Office of the Chief Actuary (OCACT) of the Social Security Administration states that subjecting all earned income to the payroll tax would, according to the analysis, extend the trust funds’ solvency by “about 35 years.” The majority of the revenue boost from reintroducing the payroll tax on the rich is negated by Biden’s additional proposals to boost COLA payouts, raise the special minimum benefit, and raise the PIA for elderly beneficiaries.
Additionally, the OCACT analysis demonstrates that taxing high earners alone is not a solution. To completely address Social Security’s $22.4 trillion funding deficit, which is growing, other options will need to be considered, even though doing so would exacerbate the issue further down the road.
Two potential solutions are a payroll tax increase of more than 12.4% on earned income or an increase in the full retirement age—the age at which a person becomes eligible to collect 100% of their monthly retirement benefit.