Can Joe Biden’s four-point plan save Social Security? The comprehensive findings are as follows:

For most retirees, Social Security income is essential to making ends meet. Nearly 90% of retirees surveyed by Gallup over the past 20 years said they rely to some degree on monthly checks to cover their expenses.

When you consider how many retired workers, disabled workers, and surviving beneficiaries receive Social Security benefits, you would think that securing the financial foundation of America’s best retirement program would be of utmost importance. Unfortunately, the foundations of this program were clearly showing signs of collapse.

Current retirees and future generations of beneficiaries are counting on lawmakers to strengthen Social Security, starting with President Joe Biden.

President Biden making remarks. Image Source: Official White House Photo: Adam Schultz.

Social Security has dug itself a hole worth more than $22 trillion.

Before we look specifically at how President Biden proposes to save Social Security, we should first look at what’s wrong with the nearly 89-year-old program.

Since benefits began being paid to retired workers in January 1940, the Social Security Commission has published an annual report examining the effectiveness of America’s best retirement programs. This allows anyone to access the program ledger to see exactly how much revenue has been collected and where the benefit money has been spent.

The Trustees’ report also forecasts Social Security’s financial health over the next 10 years (defined as the “near-term”) and 75 years, taking into account a variety of dynamic variables such as fiscal and monetary policies, as well as demographic changes. (defined as “organ”).

Every board report since 1985 has predicted a shortfall in long-term funding obligations. That is, revenue collections over the next 75 years are not expected to cover expenditures (benefits plus nominal administrative costs to run the program). As of the Trustees’ 2023 report, Social Security’s long-term cash shortfall reached $22.4 trillion.

To be clear, we do not create unfunded debt shortfalls. Again, Do not — A sign that Social Security is bankrupt or insolvent. As long as Americans continue to work, the program will continue to collect revenue through payroll taxes, which can then be paid out to eligible beneficiaries. At risk is the ability to keep existing payment schedules unchanged through 2097, including cost-of-living adjustments.

If the Trustees’ projections are accurate, the Old Age and Survivors Insurance Trust Fund, which provides monthly benefits to 50 million retired workers and 5.8 million surviving beneficiaries, could exhaust its asset reserves by 2033. To maintain payments without further cuts through 2097, we need to get up to 23%.

While many myths and false claims persist as to why Social Security is in a $22 trillion-plus hole, much of the “blame” is placed on ongoing demographic changes. This includes the well-known retirement of the baby boomer generation, but also lesser-known factors such as rising income inequality, net legal immigration to the United States falling by more than half, and historically low U.S. birth rates.

Social Security began paying out more benefits than it collected in revenue each year. U.S. Old Age, Survivors, and Disability Insurance Trust Fund assets according to year-end data from YCharts.

Four ways Joe Biden wants to change Social Security

Now that you have a better understanding of why Social Security’s financial well-being matters, let’s take a closer look at the four plans Joe Biden unveiled during his 2020 presidential campaign to strengthen the program.

1. Re-instate the payroll tax on high earners.

The representative change requested by candidate Biden at the time was to reinstate the 12.4% payroll tax on earned income (wages and salaries excluding investment income) for high earners.

In 2024, all earned income between $0.01 and $168,600 will be subject to payroll tax. Approximately 94% of American workers earn less than $168,600 per year. This means you are paying every dollar of your income into the program. For the remaining 6% of high earners, wages and salaries exceeding the maximum taxable income limit ($168,600 figure) are exempt from payroll tax.

Biden’s plan would restore the 12.4% payroll tax on earned income above $400,000 and create a donut hole between the maximum taxable income limit and the $400,000 at which income is exempt. This donut hole will naturally close over time because the maximum taxable earnings cap increases most years in line with the national average wage index.

2. Change the program’s inflation measure to CPI-E.

Another notable change proposed by Biden is switching the inflation program measure from the Consumer Price Index for Urban Wage and White Collar Workers (CPI-W) to the Consumer Price Index for Senior Citizens (CPI-E).

CPI-W has been the cost-of-living determinant of Social Security since 1975. It’s a big upgrade compared to the voluntary cost-of-living adjustments (COLAs) passed in special sessions of Congress before 1975, but still. It’s defective. CPI-W is based on the spending habits of “urban wage earners and white-collar workers,” who are generally of working age and spend their money differently than older people, who make up the majority of Social Security beneficiaries.

Meanwhile, CPI-E focuses strictly on the consumption habits of households with seniors aged 62 and older. A more accurate reading of inflation through CPI-E will result in higher annual COLAs over time.

3. Gradually increase the basic insurance amount for elderly beneficiaries.

The third proposal among Biden’s four plans to change Social Security is to gradually increase the basic insurance amount (PIA) for elderly beneficiaries. From age 78 to age 82, your PIA continues to increase by 1% per year, for a total increase of 5%.

The purpose of increasing the PIA is to help older beneficiaries offset some of the costs that may increase later in life, such as costs related to prescription drugs and medical-based transportation.

4. Increase in special minimum benefits

The final piece of the puzzle to strengthen Social Security in Biden’s four-point plan is to raise the special minimum benefit above the federal poverty level.

Lifelong low-income workers with 30 years of coverage can receive a PIA of up to $1,066.50 per month in 2024. For context, the federal poverty level per individual in 2024 is $1,255 per month.

Under Biden’s proposal, the special minimum benefit would increase to 125% of the federal poverty level and be adjusted annually for inflation 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 of Joe Biden’s Social Security plan.

But the most important question is: Can Joe Biden’s four-point plan save Social Security?

The best way to answer this question is to examine how Biden’s various proposals would affect revenue collection and spending. This is exactly what a select group of researchers at the Urban Institute, a Washington, D.C.-based think tank, have done.

In October 2020, researchers modeled themselves on Biden’s proposal and concluded that while his plan would help expand the program’s asset reserve solvency to some extent, it would not eliminate the widening funding obligation shortfall.

An extensive study by the Urban Institute found that implementing Biden’s plan immediately would have lifted more than 1 million people out of poverty by 2021 and cut the poverty rate among Social Security recipients by more than half over the next few decades. Conversely, it would “reduce the program’s long-term funding deficit by only about a quarter and extend the life of the trust fund by about five years.”

A meaningful increase in taxation of high earners would immediately increase the revenue Social Security collects, but other aspects of Joe Biden’s plan (increasing special minimum benefits, increasing PIA for elderly beneficiaries, switching from CPI to CPI-E -W) will offset most of these gains through higher annual payments.

A separate study conducted by the Penn Wharton Budget Model (PWBM) on Joe Biden’s Social Security proposal also showed unintended consequences for the U.S. economy. For example, economists at PWBM speculated that higher COLAs would encourage early retirement or shorter work hours for people who already have large nest eggs. Early retirement and/or reduced work hours can reduce productivity in the United States and have a negative impact on the gross domestic product (GDP).

On paper, Joe Biden’s plan would give Social Security a few extra years of wiggle room before across-the-board benefit cuts begin again. But taxing the rich as a primary strategy for solving Social Security’s $22.4 trillion budget deficit doesn’t work.