With Social Security beneficiaries projected to face a 23% cut by 2033, urgency is building for fixes to extend the troubled program’s solvency
Unless Congress stops kicking the can down the road and actually musters the will to do something about it, within a decade all Social Security beneficiaries will face a 23% automatic cut. That would reduce the average annual benefit by around $6,000—or $500 a month.
The Social Security Board of Trustees annual report released at the end of March revealed that the Old-Age and Survivors Insurance and Disability Insurance (OASI) trust fund, which currently pays benefits to about 57 million Americans, will become depleted by 2033 unless changes are made.
A recent PlanGap survey found “Americans are growing angrier and more scared that the government may be unable to pay their Social Security benefits in full.” Seven in 10 at or near retirement do believe benefit reductions could occur in the United States, and 84% feel frustrated or afraid that decreased benefits would have a negative impact on their retirement plan’s success. Only 9% express hope that the government will mitigate Social Security funding challenges without reducing benefits.
“Americans have watched the protests in response to benefit reductions in France, so it is no wonder 7 out of 10 people, at or near retirement age, believe benefit reductions could happen here,” said PlanGap founder and CEO David Duley. “Social Security is a significant source of income for 90% of retirees, and its uncertain future is naturally leading to fear, frustration, and doubt among the American public.”
While everyone has long known Social Security is on an unsustainable path, the urgency among lawmakers to finally address the impending crisis finally seems to be increasing. President Joe Biden and Republicans have recently made pledges not to make cuts to Social Security but a variety of proposals—including some in the form of proposed legislation—are being brought forward by lawmakers. Here’s a look at some of the more notable ones.
Next page: Sovereign Wealth Fund
Create a ‘Sovereign Wealth Fund’
Just this week, Senator Bill Cassidy (R-LA) talked about a “big idea” he and a bipartisan group of senators are working on to address Social Security’s financial crisis during a webcast hosted by the Bipartisan Policy Center.
The idea is to create an investment fund—a sovereign wealth fund—separate from Social Security, and allow the fund to accrue returns over 70 years, keeping it in escrow.
“By doing so, we would end up with a corpus enough to address 75% of the 75-year shortfall, assuming that we did give the authority to borrow to pay scheduled benefits. We think it’s a really good start on a solution,” Cassidy said during the webcast.
Cassidy said he believes the proposal would address a key failing of Social Security’s current investment strategy (he called it “the absolute worst investment strategy you could have right now”), which keeps all of the trust fund dollars in either Treasurys or cash—with Treasurys yielding anywhere from 1% to 3% at a time when inflation has been above 6%. With the fund instead investing in the market, which Cassidy noted has historically provided more than 8% returns, it could address 75% of Social Security’s projected 75-year shortfall.
“It gets us substantially there,” Cassidy said. “Now we need leading presidential candidates to step to the plate, be honest with the American people and help us find the additional 25%.”
Acknowledging that “both sides” will have to come together to cover that last 25%, Cassidy vowed lawmakers would not raise taxes on seniors or increase the retirement age.
Cassidy said the leading presidential candidates are afraid to touch Social Security—promising not to cut benefits—when what they should be worried about is a looming 24% decrease in benefits without a borrowing capacity to address it.
“If that 24% decrease goes into effect, it’ll double the rate of poverty among the elderly,” Cassidy said.
Cassidy and Sen. Angus King (I-ME) are working with a dozen other senators on new legislation that would include the creation of the sovereign wealth fund. No timeline has yet been identified for when the legislation might be introduced.
The plan has raised plenty of eyebrows, including those of the National Committee to Preserve Social Security and Medicare, which said in a March 22 letter sent to Cassidy that it would “put Social Security on a slippery slope toward privatization—and ultimately cut benefits for future beneficiaries.”
The committee’s President and CEO Max Richtman said the “so-called ‘sovereign wealth fund’ in the Cassidy-King proposal is an illusion—a smokescreen to promote a deal that is too good to be true… For the math to add up, a plan like Cassidy-King would ultimately have to cut benefits. Otherwise, we’re talking about ‘magic money’ from ephemeral Wall Street returns that may not materialize.”
Next Page: Social Security Expansion Act
Social Security Expansion Act
Sen. Bernie Sanders (I-VT) formally reintroduced the Social Security Expansion Act to Congress in February—a bill that if passed would actually expand Social Security benefits by $2,400 a year and ensure Social Security is fully funded for the next 75 years.
To do it, the Sanders bill seeks to require “the wealthiest American households to pay their fair share of taxes,” claims a Sanders-released fact sheet. “Today, because of the earnings cap on Social Security taxes, a CEO making $20 million a year pays the same amount of money into Social Security as someone who makes $160,200 a year. This legislation would lift this cap and subject all income above $250,000 to the Social Security payroll tax. Under this bill, over 93% of households would not see their taxes go up by one penny.”
The estimates reflect an analysis of the legislation conducted by the Social Security Administration at the request of Sanders, which was released Feb. 13 in a letter from Chief Actuary Stephen Goss.
The premise behind raising the income tax, Sanders argues, is that the burden of funding Social Security needs to be shifted away from the middle class and more toward the wealthy by raising the OASDI payroll tax to covered earnings above $250,000 for 2024 and later. Under current circumstances, the Sanders proposal claims those earning over the cap pay an effective Social Security payroll tax rate of 1% or less, while those earning under the cap get stuck footing a bill that’s six times higher.
Under the Sanders proposal, all earnings taxed above $250,000 would not be credited for benefit computation purposes—meaning the wealthy who would pay additional Social Security taxes would not receive higher benefits for doing so down the road.
The Social Security Expansion Act was first introduced on June 9, 2022 by Sanders and U.S. Rep. Peter DeFazio (D-OR). This time, Sanders has a new coalition of supporters in fellow Senator Elizabeth Warren (D-MA) and Reps. Jan Schakowsky (D-IL) and Val Hoyle (D-OR), who are showing renewed interest in Social Security reform amid Republican talk of proposed cuts to Social Security as the U.S. faces its latest debt ceiling crisis.
Eight other senators and 25 Democrats from the House of Representatives signed on as cosponsors of the bill.
Next Page: Raising the cap to $400,000
Raising the cap to $400,000
Besides the Sanders proposal, there have been a number of other proposals to increase, eliminate, or otherwise adjust the payroll tax cap as a way to shore up Social Security’s finances.
President Joe Biden has floated the idea of applying the Social Security payroll tax to earnings over $400,000 instead of the $250,000 proposed in the Sanders bill. This echoes his campaign stance not to raise taxes on anyone making less than $400,000 per year, which he reiterated during his State of the Union address in February.
Biden’s campaign proposal to increase the payroll tax cap to $400,000 would only delay Social Security’s insolvency until 2044. After that point, Social Security recipients would face the prospect of an 11% benefit reduction.
While Biden called for “protecting and strengthening” Social Security when introducing his fiscal 2024 budget in March, he stopped short of proposing a specific plan to address the trust fund shortfalls. He did hint at plans to work with Congress to strengthen the program, but without making any benefit cuts.
Another proposal aimed at raising the cap to $400,000 is the Social Security 2100 Act, first introduced by Rep. John Larson (D-CT) in October of 2021.
The Democrat-supported bill, which has not yet been reintroduced in Congress in 2023 and has no Republican support, would apply the Social Security payroll tax to earnings over $400,000 in addition to earnings below the current maximum taxable amount ($160,200). The gap—or “donut hole”—between the two would narrow over time as the maximum taxable amount increases and the $400,000 threshold remains unchanged.
A Fact Sheet from Larson’s website says the bill would mean “the wealthy pay the same rate as a waitress earning $30,000 a year. This provision would only affect the top 0.4% of wage earners.”
Per a blog from the Peter G. Peterson Foundation, since 1975, the taxable maximum has generally been increased each year based on an index of national average wages. About 6% of the working population earns more than the taxable maximum.
Low- and moderate-income individuals pay a higher proportion of their income in payroll taxes than do higher-income taxpayers. In part, that situation stems from the existence of the tax cap for Social Security. For example, someone with wage income of $67,000 per year would owe $4,154 for their share of Social Security taxes. However, someone with triple that income—or $201,000—would owe $8,854, which is just more than double the amount of tax.
The previous version of the bill includes 13 provisions that would increase Social Security benefits, 12 of which would be temporary, applying for only five years. Larson’s fact sheet says the bill would reduce Social Security’s 75-year shortfall by about half and extend “the date at which benefits would be cut by 20% by nine more years from 2035 to 2044.”
Next Page: Other ideas being floated
Other ideas being floated
In addition to previously mentioned proposals, there are almost countless other ideas for avoiding steep benefit cuts—but many would involve cutting benefits in some form.
Among the most commonly cited:
• Raising the retirement age from 67 to 70. Currently Americans can take early benefits at 62, but the full retirement age is 66 or 67, depending on the month and year of birth. The Republican Study Committee budget, put forward by House leaders, has called for Social Security’s full retirement age to gradually go up until it is increased by three years. Based on their proposal, people born in 1978 or later would have a full retirement age of 70.
• Raising the payroll tax percentage. Currently, employers and employees each pay a tax of 6.2% of wages, and raising those rates could have a big impact on the program’s solvency. One proposal mentions raising the tax by 0.1% over the course of 20 years to 7.2% of wages.
• Means-test benefits. The concept is to protect people below a certain annual income or wage level so they get full benefits while those who are financially healthier would sacrifice some or all of their Social Security payments.
SEE ALSO:
• Bernie Sanders Reintroduces Bill to Increase Social Security Benefits, Extend Solvency
• Social Security Trust Fund Projected to be Depleted in a Decade
• Latest Bill Pushes for Increased Social Security Earnings Limit
• 4 Senators Want Americans to Wait Until 70 to Claim Social Security