Can Joe Biden's 4-Point Plan Save Social Security? Here's What a Comprehensive Study Showed
Sean Williams, The Motley Fool
8 min read
For most retirees, Social Security income is a necessity to make ends meet. As many as 90% of retirees surveyed by Gallup over the past two decades have noted that they lean on their monthly check, to some degree, to cover their expenses.
Considering how many retired workers, workers with disabilities, and survivor beneficiaries count on Social Security, you'd think ensuring the financial foundation of America's top retirement program would be paramount. Unfortunately, the foundation for this program has shown clear signs of crumbling.
President Biden delivering remarks. Image source: Official White House Photo by Adam Schultz.
Social Security has dug itself a greater than $22 trillion hole
Before digging into the specifics of how President Biden has proposed to save Social Security, we first need to examine what's gone wrong with this nearly 89-year-old program.
Ever since retired-worker benefits began being paid in January 1940, the Social Security Board of Trustees has released an annual report that effectively acts as a checkup for America's top retirement program. It allows anyone access to the program's ledger to see exactly how much revenue was collected, and where benefit dollars ended up.
The Trustees Report also factors in an assortment of dynamic variables, such as fiscal and monetary policy, as well as demographic changes, to forecast the financial health of Social Security over the next 10 years (defined as the "short term") and 75 years (defined as the "long term").
Every Trustees Report since 1985 has forecast a long-term funding obligation shortfall. In other words, revenue collection over the next 75 years is not expected to cover outlays (benefits plus nominal administrative expenses to run the program). As of the 2023 Trustees Report, Social Security's long-term cash shortfall reached $22.4 trillion.
To be absolutely clear, an unfunded obligation shortfall does not -- I repeat, does not -- signal that Social Security is bankrupt or insolvent. As long as Americans keep working, the program will continue to collect revenue via the payroll tax, which can be disbursed to eligible beneficiaries. What's at risk is the ability to keep the existing payout schedule unchanged through 2097, including cost-of-living adjustments.
If the Trustees forecast is correct, the Old-Age and Survivors Insurance Trust Fund, which provides monthly benefits to 50 million retired workers and 5.8 million survivor beneficiaries, could exhaust its asset reserves by 2033. Such an occurrence would lead to sweeping benefit cuts of as much as 23% to sustain payouts without the need for any additional reductions through 2097.
Although a number of myths and false claims persist as to why Social Security is in a greater-than-$22 trillion hole, the bulk of the "blame" lies with ongoing demographic shifts. This includes the well-known retirement of baby boomers, as well as lesser-known factors such as rising income inequality, a more-than-halving in net-legal immigration into the U.S., and a historic low for the U.S. birth rate.
Four ways Joe Biden wants to change Social Security
Now that you have a better understanding of why Social Security's financial well-being is in question, let's take a closer look at the four-point plan Joe Biden unveiled during his own presidential campaign in 2020 to strengthen the program.
1. Reinstate the payroll tax on high earners
The flagship change called for by then-candidate Biden was to reinstate the 12.4% payroll tax on earned income (wages and salary, but not investment income) on high earners.
In 2024, all earned income between $0.01 and $168,600 is subject to the payroll tax. Roughly 94% of working Americans earn less than $168,600 annually, which means they're paying into the program with every dollar in earnings. For the remaining 6% of high earners, wages and salary above the maximum taxable earnings cap (the $168,600 figure) are exempt from the payroll tax.
Biden's plan would reinstate the 12.4% payroll tax on earned income above $400,000, and create a doughnut hole between the maximum taxable earnings cap and $400,000 where earnings would remain exempt. Since the maximum taxable earnings cap rises most years in lockstep with the National Average Wage Index, this doughnut hole would naturally close over time.
2. Change the program's inflationary measure to the CPI-E
Another hallmark change proposed by Biden is to shift the program measure of inflation from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E).
The CPI-W has been the cost-of-living determinant for Social Security since 1975. Although it's a big upgrade when compared to arbitrary cost-of-living adjustments (COLAs) passed along by special sessions of Congress prior to 1975, it's still flawed. The CPI-W is based on the spending habits of "urban wage earners and clerical workers," who are typically of working age and spend their money differently than the seniors who comprise the bulk of Social Security's beneficiaries.
Meanwhile, the CPI-E strictly focuses on the spending habits of households with seniors aged 62 and over. A more accurate read on inflation via the CPI-E should lead to higher annual COLAs over time.
3. Gradually increase the primary insurance amount for aged beneficiaries
The third proposal in Biden's four-point plan to change Social Security is to gradually increase the primary insurance amount (PIA) for aged beneficiaries. Beginning at age 78 and continuing through age 82, the PIA would increase by 1% annually, until a total increase of 5% is achieved.
The purpose of increasing the PIA is to help aging beneficiaries offset some of the expenses that can grow later in life, such as the costs associated with prescription medicine and medical-based transportation.
4. Lift the special minimum benefit
The final piece of the puzzle to strengthen Social Security in Biden's four-point plan is to lift the special minimum benefit above the federal poverty level.
A lifetime low-earning worker with 30 years of coverage can receive a maximum PIA in 2024 of $1,066.50 per month. For context, the federal poverty level in 2024 for a single individual is $1,255 per month.
Under Biden's proposal, the special minimum benefit would be increased to 125% of the federal poverty level and adjusted for inflation on an annual basis thereafter. If the president's proposal were law right now, the special minimum benefit for 30 years of coverage would be $1,568.75 per month in 2024.
Image source: Getty Images.
A comprehensive study weighs in on Joe Biden's Social Security plan
However, the all-important question is: Would Joe Biden's four-point plan save Social Security?
The best way to answer this question is by examining how Biden's various proposals would affect revenue collection and outlays. That's exactly what a select group of researchers did at Washington, D.C.-based think tank Urban Institute.
In October 2020, researchers modeled Biden's proposals and came to the conclusion that while his plan would modestly help extend the solvency of the program's asset reserves, it wouldn't close the widening funding obligation shortfall.
According to Urban Institute's extensive study, immediate implementation of Biden's plan would have lifted more than 1 million people out of poverty by 2021 and reduced the poverty rate for Social Security beneficiaries by more than half in the coming decades. Conversely, it would only close "about a quarter of the program's long-term funding deficit and extend the life of the trust funds by about five years."
While meaningfully increasing taxation on high earners would create an immediate boost in revenue collected by Social Security, the other aspects of Joe Biden's plan (raising the special minimum benefit, increasing the PIA for aged beneficiaries, and switching to the CPI-E from the CPI-W) would offset much of these gains via higher annual payouts.
A separate study conducted by the Penn Wharton Budget Model (PWBM) of Joe Biden's Social Security proposal also found unintended consequences for the U.S. economy. For instance, PWBM's economists surmised that higher COLAs would encourage earlier retirement or fewer work hours for those with already large nest eggs. Earlier retirement and/or fewer work hours would reduce U.S. productivity and have a negative effect on gross domestic product.
On paper, Joe Biden's plan would provide Social Security with a few extra years of breathing room before sweeping benefits cuts would be back on the table. However, taxing the rich as a foundational strategy to resolve Social Security's $22.4 trillion funding deficit won't get the job done.
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