Biden Plans To Fix Social Security’s Short-Fall In 2034
Social Security is falling short because of persistent wage inequality and political inaction; President-elect Biden has comprehensive plans to strengthen Social Security.
The inequality of wage income and taxable wages is the most salient and unexpected reason for the Social Security revenue shortfall predicted in 14 years when Social Security will only be able to pay 76% of promised benefits. As a result, the elder poverty rate, living on less than $1,000 per month, will increase from 4.8 to 9% in 2034.
Because Social Security only taxes income up to an annual cap, which is $142,800 in 2021, when people who earn over that amount do better than everyone else more income escapes the Social Security tax as Christian Weller explains. The Economic Policy Institute calculates wages for the top 1% grew 158% since 1979, while wages for the bottom 90% of earners grew only 24%.
The Congressional Research Service in September 2020 also fingers increasing earnings inequality as the culprit causing the share of earnings taxed for Social Security decreasing from 90% in 1982 to a whopping 84% in 2017.
How did the share drop so far so fast?
When Congress last adjusted the cap in 1977, policymakers set the cap – admittedly it was arbitrary, it happened to be the share taxed at the time — to cover 90 percent of all wages. The cap was indexed to average wage growth because policy makers figured earners at all levels would get about the same increase in wages. In his signing statement on the 1977 amendments, President Carter emphasized that beyond their importance in terms of increasing program revenue, the tax max changes were also significant because they achieved this goal in a manner that fostered equity. He suggested that addressing the shortfall primarily through increasing the tax max was “making the system more progressive and minimizing the added burden for low- and moderate-income workers.” Policy makers had no idea in the late seventies that everyone wages above the cap would grow so much faster than average.
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Inequality Will Worsen Because of Covid-19
The sad thing is a larger share of workers will probably escape FICA taxes in 2020 because the COVID-19 recession hit people at the bottom the most. My calculations from government data show almost half (48%) of the jobs losses from November 2019 to November 2020 came from the three lowest-paid industries that employ just 38% of the labor force—services, trade, and leisure and hospitality. Low income workers lost their jobs, high paid tech and finance workers kept theirs so the median weekly earnings actually are 8.2 percent higher in the third quarter of 2020 compared to the same time last year.
According to Brookings Institution Analysts, Molly Kinder and Laura Staetler Amazon AMZN and Walmart WMT , for instance did well—profits up 56%, but their workers barely got a raise. Stock prices for Amazon and Walmart rose about 70% and 36%, respectively, from mid-March to mid-December, while their workers’ wages will have grown only 7% and 6% by the end of December 2020. (By the way Jeff Bezos’ salary is a small $81,000 — his income comes from wealth [plans to tax wealth for Social Security have not advanced in policy circles.])
Beneficial Effects of Raising the Cap
The Congressional Research Service report mentioned above showed the earnings cap was eliminated entirely – meaning that 6.5% of high-paid employees would pay Social Security tax all year round, and do nothing else, the extra revenue would solve the longer term financial gap for 40 years.
And, boosting hope for a bipartisan solution, evidence suggests raising the cap to increase Social Security revenue would be quite popular. A National Academy of Social Insurance survey reports that 77% of Americans feel it is critical to preserve Social Security benefits for future generations, even if it means raising taxes.
Economists view raising the cap as beneficial. Because raising the cap would mean only a few of the highest earners pay more, it is unlikely to inhibit overall economic activity or cause any meaningful economic harm. Nobel Laureate Peter Diamond and Emmanuel Saez have suggested that very high earners should be subjected to high and increasing tax rates.
Raising the cap may be more fair. Urban Institute Melissa Favreault notes asking more from affluent workers will help right another inequity caused by income-based longevity gaps (made much worse by COVID-19). Life expectancy is rising with income – higher income works will collect Social Security benefits longer, they can pay more for them.
Biden Proposes to Raise the Cap and Eliminate Elder Poverty
President-elect Biden, like many others (see the table “E2” in this report from the Social Security actuaries), is proposing to eliminating part of the cap. Biden’s proposal brings in less money than total elimination, but perhaps his plan has a better chance of passing. Biden would eliminate the cap for people with annual salaries over $400,000. Instead of for the 9 million people who earned over the cap of $137,700 in 2019. Biden’s hike would affect over 800,000 highly – paid and wealthy people (a smaller group than the population of Delaware.)
Urban Institute’s Karen E.Smith, Richard W. Johnson and Melissa M. Favreault estimates Joe Biden’s Social Security plan would not increase taxes for middle-class workers or even upper – middle class workers. The plan’s tax hike would hit fewer than 1 percent of earners initially and would never affect more than the top 6 percent of earners.
The best aspect of the plan? Biden would reduce poverty rates for retirees and people with disabilities and improve the program’s finances. The Social Security system is key to solving wealth inequality — it plays a crucial role in narrowing retirement wealth inequality between the rich and the poor.
So, good news, we have a popular fix to a huge elder poverty problem and growing wealth inequality!
Bipartisanship can rule the day to solve a pressing social and humanitarian problem. As Economist Kathleen Romig notes, Republicans and Democrats have come together before to solve big social insurance problems. In 1994, a bipartisan group of politicians eliminated the Medicare earnings cap. Since then, everyone pays Medicare taxes all year long. And since 2016, higher earners pay a surcharge and there were no complaints from the rich.
Google GOOG executives, Intel INTC executives, wealthy executives from the industries that have thrived this year could help here. If they advocated for raising the Social Security earnings cap they could eliminate elderly poverty in the U.S. for the next 75 years and help right inequality. 2021 could witness a healing moment for our battered and unequal society.