10 things you need to know
For most Americans, Social Security is a necessary source of income that helps make ends meet. More than two decades of annual Gallup polling has shown that between 80% and 90% of then-current retirees, along with 76% to 88% of future retirees, depend or expect to depend in some way on their monthly income. Social Security check To cover their expenses.
To ensure the financial well-being of the aging workforce, the foundation of America’s top retirement program must remain solid. Unfortunately, the cracks in this foundation have been evident for nearly four decades.
More than 67 million current beneficiaries, along with more than 100 million workers in the workforce, depend on elected lawmakers to boost Social Security and avert disaster. This includes President Joe Biden, who, before being elected president in 2020, Unveiled a multi-point plan to reform Social Security.
Here are the 10 things you absolutely need to know about the path of Social Security, the principles of Joe Biden’s plan, and whether or not the president’s proposal will succeed.
1. Social Security has more than $22 trillion in unfunded liabilities
Every year since 1985, a Social Security Board of Trustees report estimates that America’s top retirement program will not bring in enough revenue to cover long-term expenses. In this sense, “long term” is defined as 75 years after the report.
The size of Social Security’s unfunded liabilities has been growing steadily for nearly four decades. As of the Trustees’ 2023 report, the estimate was a long-term cash shortfall of $22.4 trillion.
Although some Internet myths blame undocumented workers and/or Congress’ “theft” of the program’s trust funds for this mess, the bulk of Social Security’s shortcomings can be traced to major demographic changes, such as rising inequality. income, and historically low birth rates. Legal immigration to the United States has declined by more than half since 1998.
2. The current payment schedule is highly questionable, with the real possibility of benefits being cut by 2033
Although Social Security’s financial basis is weak, it is not at all at risk of bankruptcy or insolvency.
Two of the program’s three funding sources—the payroll tax on earned income and taxes on benefits—account for nearly all of the program’s revenue. As long as people continue to work and pay their taxes, payments will go out to eligible recipients.
What is at stake is the continuity of the current payment schedule. If the Old-Age and Survivors Insurance (OASI) Trust Fund depletes its asset reserves by 2033, as the trustees expect, across-the-board benefit cuts of up to 23% could await retired workers and survivor beneficiaries.
3. Joe Biden proposed increasing payroll taxes on high-income earners
While on the campaign trail in 2020, then-candidate Biden released a four-point plan designed to boost Social Security. The critical aspect of this proposal was to increase payroll taxes on high-income earners.
In 2024, all earned income (wages and salaries, but not investment income) between $0.01 and $168,600 is subject to a 12.4% payroll tax. Nearly 94% of workers will bring home less than $168,600 (the maximum taxable earnings) this year, so they will owe tax on every dollar they earn. Meanwhile, earned income north of $168,600 is exempt from payroll tax.
Under Biden’s plan, the payroll tax would be reinstated on earned income above $400,000, creating a gap between the maximum taxable earnings and $400,000 where the payroll tax break would remain. Since the maximum taxable income rises in most years in conjunction with the national average wage index, this gap will naturally close over time.
4. The president wants to shift the measure of inflation from the Consumer Price Index (CPI-W) to the Consumer Price Index (CPI-E).
Another critical element of Biden’s plan is to move away from the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W) as an inflationary measure of Social Security.
The Consumer Price Index (CPI-W) has been the determinant of Social Security’s cost of living adjustment (COLA) every year since 1975. The problem, as you can see by its full name, is that it focuses on the spending habits of “urban wage earners and clerical employees.” “Workers.” These are typically working-age Americans who are not currently receiving a Social Security check. Moreover, they spend their money very Differently from the elderly, who constitute the vast majority of the program’s beneficiaries.
Biden’s proposal would see the Consumer Price Index (CPI-W) removed in favor of the Consumer Price Index for the Elderly (CPI-E). The Consumer Price Index (CPI-E) focuses strictly on the spending habits of households with people ages 62 and older. More accurate inflation readings should result in higher total COLAs over time.
5. Biden proposed increasing the private minimum interest rate
The third key principle of Joe Biden’s Social Security plan is to meaningfully increase the minimum private benefits.
In 2024, a lifetime low-income worker with 30 years of coverage could receive no more than $1,066.50 per month. By comparison, the federal poverty level for the 48 contiguous U.S. states in 2024 is $1,255 per month.
The president’s offer is to raise the special minimum benefit to 125% of the federal poverty level and adjust it annually thereafter to take into account inflation. If this proposal became law now, the special minimum benefit for someone with 30 years of coverage would be $1,568.75, or more than $500 per month.
6. The President’s proposal would gradually increase the share of the program’s beneficiaries for elderly beneficiaries
The fourth big change Joe Biden wants to make is to gradually raise the primary insurance amount (PIA) for elderly beneficiaries. Specifically, Biden’s plan calls for a 1% annual increase in PIA, starting at age 78 and continuing until age 82, which would result in an overall increase of 5%.
This increase is intended to help partially offset some of the expenses that can grow as we age. This includes, but is not limited to, the costs of prescription medications, as well as medical transportation expenses.
7. Joe Biden’s plan will expand the solvency of the program’s asset reserves
The most important question: Will Joe Biden’s Social Security changes strengthen the program?
The definitive answer is yes, it will be.
Researchers at the Washington, D.C.-based Urban Research Institute analyzed Biden’s proposal in October 2020 and came to the conclusion that all of its components “would close about a quarter of the program’s long-term funding shortfall and extend the life of the trust funds by 2020.” “About five years.”
8. Biden’s four-point proposal falls short of closing Social Security’s long-term funding gap
On the other hand, Joe Biden’s big changes will come nowhere close to closing the program’s growing long-term funding gap.
Although increasing payroll taxes on high earners would immediately boost Social Security revenues, other aspects of Biden’s plan would offset much of these gains. Raising lifetime benefits for low-income workers, increasing the beneficiary income calculation for elderly beneficiaries, and switching to the Consumer Price Index (CPI-E), which increases compensation for all beneficiaries over time, offset much of the additional revenue from Taxes the rich.
What Biden’s proposal makes clear is that taxing the rich, by itself, will not be enough to fill Social Security’s funding shortfall in the long run.
9. The President’s Social Security plan will lead to unintended economic consequences
In addition, the President’s four-point plan to reform Social Security would lead to some negative unintended consequences for the American economy.
Analysis by economists at the nonpartisan Penn Wharton Budget Model (PWBM) in March 2020 suggests that switching to the Consumer Price Index (CPI-E) from the Consumer Price Index (CPI-W) would put individuals with significant retirement savings into work. Less often or they retire early. This will have negative effects on productivity in the United States and lead to lower GDP by 2030 and 2050.
Moreover, increasing the payroll tax on high-income earners would “distort labor supply decisions beyond the current payroll tax,” economists at PWBM put it. Simply put, targeting high-income individuals would encourage these workers to defer their income, work less, or generate income from sources that avoid the payroll tax. This is also negative for the US economy in the long run.
10. Biden’s Social Security proposal has almost no chance of becoming law
Perhaps the biggest problem of all is that President Biden does not have the votes on Capitol Hill to see his proposal become law. Amending the Social Security laws would require 60 votes in the U.S. Senate, and it has been 45 years since either party had a supermajority of 60 seats. In short, bipartisan support will certainly be needed.
The challenge is that Democrats and Republicans have approached Social Security “reform” from opposite sides, each with a plan to strengthen the program. Since both parties’ proposals are successful, neither has the incentive to work with the opposition to find common ground. And so the stalemate continues.
Although Congress has a history of stepping in to save Social Security at the eleventh hour, delaying will only make eventual reform more costly for working Americans and/or the program’s more than 67 million beneficiaries.
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Joe Biden wants to make big changes to Social Security: 10 things you need to know Originally published by The Motley Fool
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