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Poverty rates among seniors soared as the economy collapsed during the Great Depression, prompting the passage of the Social Security Act in 1935. The program was originally designed to provide income to retired workers age 65 and older, though it has since expanded to cover other types of beneficiaries
Today, Social Security benefits are a lifesaver for countless Americans. The program lifted 26.5 million people out of poverty in 2020 alone, according to the Census Bureau, and nearly 90% of retired workers depend on Social Security income to make ends meet. That said, the system is in need of reform. The Social Security program operated at a deficit last year, and the trust fund is facing depletion by 2035. Additionally, benefits have lost a substantial amount of buying power in the past two decades, meaning retired workers and other beneficiaries have effectively taken a pay cut.
Here are three changes Joe Biden has proposed to address those issues.
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Apply Social Security payroll tax to more earnings
The Social Security program is funded through payroll taxes and interest earned on trust fund assets. Last year that income failed to cover the cost of the program — it fell short by $59 billion. Worse yet, the Social Security Board of Trustees believes that annual shortfall will persist through 2096.
That trend is obviously unsustainable. In fact, the Social Security trust fund is on pace to be depleted by 2035, according to the Board of Trustees. At that point, payroll taxes will cover just 80% of scheduled benefits, and that figure will fall to 74% of scheduled benefits by 2096.
There are only two ways to solve that problem. The Social Security program either needs more income, or it needs to cut costs. One of President Biden’s proposals aims to increase income by applying Social Security payroll tax to earnings above $400,000. Under the current law, only the first $147,000 in earnings are subject to tax, though the maximum taxable limit typically rises each year to account for general changes in wage levels. That means Biden’s proposal would create a donut hole — between $147,000 and $400,000 — that would slowly close over time.
As a caveat, that change alone would not keep the Social Security trust fund solvent indefinitely, though it would delay the trust fund depletion date until 2048, according to the Office of the Chief Actuary.
Change the formula for cost-of-living adjustments (COLAs)
Social Security checks receive an annual cost-of-living adjustment (COLA) to ensure benefits keep up with inflation. Under the current law, inflation is measured using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But many policy experts and politicians see a problem with using the CPI-W to calculate COLAs.
The CPI-W is based on buying patterns of individuals in the workforce, but retired workers often spend their money very differently. For instance, working-age individuals tend to spend less on housing and medical care, but those are two of the biggest expenses for retired workers. That means the CPI-W underemphasizes the impact of price increases in the spending categories most relevant to retired workers. To that end, The Senior Citizens League estimates that Social Security benefits have lost 40% of their buying power since January 2000.
To solve that problem, President Biden would change the formula used to calculate Social Security COLAs by replacing the CPI-W with the CPI-E (the Consumer Price Index for the Elderly). That metric tracks the buying patterns of individuals age 62 and older, making it much more relevant to retired workers than the CPI-W.
How big is the impact? The CPI-E tends to put inflation two-tenths of a percentage point higher each year than the CPI-W, according to the Office of the Chief Actuary. That may not sound like much, but two-tenths of percentage point compounded annually over two decades is four full percentage points.
Pay long-lived beneficiaries a bigger Social Security benefit
Retirees tend to spend more on medical care and prescription drugs as they age, and that often leads to financial hardship as retirement accounts and savings are slowly depleted over time. To account for those rising costs, President Biden would increase the benefit paid to long-lived beneficiaries. His proposal would phase in during year 16, increasing the recipient’s baseline Social Security benefit by 1% annually through year 20. In other words, beneficiaries would see their Social Security checks rise by 1% for five consecutive years, starting 16 years after they first claim benefits.
As a final thought, none of the proposals discussed in this article have yet been signed into law, though all of them could have a significant impact on the financial well-being of retired workers and other beneficiaries. That’s why it’s important to stay informed on changes to the Social Security program.
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