Analyzing the President-Elect’s plans for Social Security

As of today, the Associated Press (along with most major media outlets) has called the 2020 Presidential Election in Joe Biden’s favor. Recount challenges are ongoing in several close swing state races, and the President has not conceded at this time. This article was written within the context of the information we currently have regarding election results.

After a historic—and in many ways unprecedented—election, we now know who will be responsible for taking on the critical problems our nation faces going into 2021.

One of the most glaring problems, of course, will be addressing Social Security’s catastrophic funding shortfall. As we are all well aware, Social Security is barreling down an expressway toward total reserve depletion and mandatory benefit cuts.

For many years, the Social Security Trustees have projected a 2034 to 2035 depletion date. But with the unforeseen pandemic and its economic ravages, some financial analysts and Social Security advocacy groups project that date may move up as much as six years. If that comes to pass, the President-Elect today could end up being the person at the helm when Social Security insolvency becomes a certainty.

Regardless of whether that date is 2028, 2030, or 2035, it is nevertheless true the incoming Administration will be pivotal to making sure these benefit cuts don’t have to happen and that we aren’t making rash legislative decisions at the eleventh hour. Legislative intervention has to happen and it has to happen now.

Though it’s apparent there’s still a lot to sort out before the year is done, right now it appears that Adminstration will be former Vice President Joe Biden’s.

Thanks to COVID-19, Social Security’s funding problems took a serious backseat as an issue of importance on the campaign trail. We unfortunately can’t say either candidate truly paid Social Security the attention it desperately needed to be paid during the past year of debate. As a result, what the President-Elect’s Social Security platform is might not be something of which a lot of us are readily aware.

That’s why we want to take a detailed look at Biden’s platform and what effect it will have on Social Security’s long-term solvency and how it will directly affect retiree benefits if put into action.

Raising payroll taxes on high-earners

This is the answer to the big question: how does the President-Elect propose to close Social Security’s funding gap and extend long-term solvency?

Biden’s plan reflects a very popular proposal with both the public and Democrat lawmakers: to increase Social Security’s revenue by requiring high-earning workers to contribute more in payroll taxes.

Right now, there is a maximum taxable wage cap set at $137,700. This means only earnings up to $137,700 in a year are subjected to the FICA tax that funds Social Security. Every dollar a high-earner makes after that cap is NOT FICA-taxable. This has been a huge point of contention in the United States—the average American only makes about $56,000 per year and therefore contributes to Social Security on 100% of their income. Many Americans consider this regressive tax that puts the burden of financing Social Security on the shoulders of those most likely to feel the negative impacts.

But despite the popularity of this policy proposal, the wall that has always stood between significantly raising or eliminating the cap is the reality that asking the wealthy to contribute more equally, if not more, unfair.

For example, if we removed the cap entirely and subjected all workers’ salaries to 100% taxing, high-earners would not only float a wildly disproportionate amount of Social Security’s finances, but they would never be able to withdraw benefits even close to what they put in. The absolute maximum a beneficiary can withdraw is just short of $4,000 per month. That wouldn’t even begin to repay the wealthiest Americans’ contributions. It would be viewed as forcing a small group of our citizens to pay for the retirement of millions of people for very little in return—essentially, making Social Security into a welfare program funded by the rich.

To address both the concerns of supporters and opponents, many legislators have proposed compromise wage cap adjustments that would exempt a significant portion of Americans falling close to the wage cap, instead targeting only those who earn the highest of high salaries. And this is exactly how Biden is proposing we deal with increasing Social Security revenue.

His plan to extend Social Security’s solvency is to create a new FICA-taxable wage base among extremely high-earners. We would keep the first maximum taxable wage cap at the current level, but we would introduce a second FICA-taxble group beginning at those who earn $400,000 or more per year. Those earning falling between those groups would continue to contribute to payroll taxes as they already do, and the additional payroll tax burden would be taken on by those least likely to be affected by it or depend on Social Security benefits during retirement.

Raising benefit amounts for low-earners

Creating a new taxable wage base serves a dual purpose under Biden’s Social Security plan. While extending Social Security’s solvency, the additional payroll tax contributions would be used to increase benefits for the most vulnerable beneficiaries.

Biden’s proposal seeks to increase the minimum Social Security benefit for long-term beneficiaries, widows and widowers, and low income earners.

Retirees who have received benefits for 20 years would receive a 5% bump to their benefit amount. Surviving spouses would receive a 20% increase on the benefit they would normally receive from their partners’ benefits. Those with work histories 30 years or more would receive a benefit bump equivalent to an amount 125% the federal poverty level. All of these policies are meant to target retirees who typically receive the least in benefits and are the most financially vulnerable.

Switching to the CPI-E

“CPI,” or Consumer Price Index, refers to the formula the government uses to assess price inflation and determine Social Security COLA increases.

The current CPI used to determine the COLA, the CPI-W, has been a target of heavy criticism for years. It’s a formula that determines inflation rates based on the spending habits of working Americans—not retirees or the elderly, usually resulting in seniors getting the short end of the COLA stick.

To give a current day example of how this works, we only need look at how the Coronavirus has impacted inflation rates. With traveling limited, there’s been a historic decrease in the price of gasoline and oil. Gasoline is a big ticket item in the CPI-W basket of consumer goods despite seniors using relatively little gasoline in their daily lives.

This drop in gas prices has a net impact of reducing overall inflation rates—even with the cost of healthcare and groceries going up. As a result, though seniors are losing buying power rapidly as a demographic, the COLA for next year is a measly 1.3% owing almost entirely to the drop in price of an item seniors don’t really use.

Lawmakers have been pushing the concept of a retiree-specific CPI for many, many years. This CPI, the CPI-E, would completely change that market basket of consumer items and how we weight their importance based on how seniors actually spend their money. Using a CPI-E-style formula would prevent things like gasoline from keeping Social Security COLA boosts artifically low while healthcare and prescription drug costs rise under the radar.

A big part of Biden’s proposal is to make that CPI-E switch, effectively giving all beneficiaries a benefit boost through realistic COLA boosts each year. And while this wouldn’t give seniors a massive raise, it would certainly put a noticeable amount of money back into retirees’ pockets and protect them from future economic situations like the one we’re in now.

The bottom line

In individual terms, the policy proposals in this package are pretty popular with the public. Countless surveys have shown Americans do support ideas like raising the taxable wage cap, switching to the CPI-E, and raising minimum Social Security benefits. These policies are present in the 2100 Act, the most widely supported Social Security legislative package we’ve seen in the past several years.

But in a cumulative analysis, would Biden’s proposal achieve the long-term funding fix Social Security needs first and foremost?

No. Not even close, unfortunately.

The generally accepted benchmark for achieving “long-term solvency” is a plan that puts at least 75 years back on the clock. This is what legislators are ultimately looking to hit when they put together Social Security reform packages.

The cumulative impacts of Biden’s revenue increases and benefit increases under his plan is only estimated to increase Social Security’s solvency by five years. Though the benefit increases are projected to lift as many as one million beneficiaries out of poverty, after paying the cost of those increases, the increase in payroll tax contributions would only be enough to close a quarter of Social Security’s funding shortfall. It wouldn’t rebuild Social Security’s reserves, and it would only push the problem off onto the next President.

While we applaud attempts to fix some of Social Security’s most glaring issues and make a meaningful effort to help those struggling to survive on bare minimum benefits, it means nothing to temporarily boost benefits only to potentially rip them away in five years when we can’t afford them.

Effective Social Security reform legislation necessarily involves fixing this long-term shortfall. We can create the most generous, fair, and impressive Social Security system in our history, but if it only lasts a handful of years, we aren’t helping anyone.

Achieving that solvency is—and SHOULD BE—our primary challenge.

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