Biden has pledged to strengthen the program. But he can pull that off?
Social Security is in trouble. Things aren’t bad enough that the program is at risk of going away completely. But in the coming years, Social Security expects to owe more in scheduled benefits than it collects in revenue.
The good news is that Social Security can take money out of its trust funds to keep up with benefits for a period of time (according to recent estimates, roughly another decade). But from that point onward, retirees may be looking at reduced benefits across the board.
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President Biden doesn’t want that to happen. Cutting benefits would no doubt hurt countless seniors who get the bulk (or all) of their income from Social Security.
As it is, current recipients are struggling to make ends meet given that Social Security’s cost-of-living adjustments are not keeping pace with inflation. To then cut benefits would leave many older Americans in a serious lurch. Plus, benefit cuts could ruin the plans of current workers who are banking on Social Security to fund a good portion of their retirement.
Thankfully, President Biden has stated repeatedly that he’s committed to strengthening Social Security and preventing sweeping benefit cuts. But whether his plan to shore up the program’s finances is successful is, in a word, iffy.
The proposed solution
President Biden wants to make a number of changes to Social Security. But in the context of preventing benefit cuts, his primary strategy is to impose taxes on higher earners to pump more money into the program.
Under the current system, workers are no longer on the hook for paying into Social Security once their earnings exceed $168,600. That number can, and probably will, rise in 2025 to account for inflation and wage growth.
The point, however, is that there’s a wage cap established every year that limits the extent to which higher earners pay into Social Security. Biden is looking to change that by reinstating Social Security taxes on earnings over $400,000. The goal is to make sure the wealthy are paying their share without burdening low- and middle-income households.
Is Biden’s plan a good one?
President Biden has the best of intentions in the context of saving Social Security. But his plan has a serious flaw.
First, it needs to actually go through. It’s unlikely that Republican lawmakers will let that happen if they can help it. Many Republican leaders would rather prevent Social Security cuts by postponing full retirement age beyond age 67 for those born in 1960 or later.
Secondly, under the current payroll tax system, earnings beyond the annual wage cap aren’t taxed for Social Security purposes. But those wages also aren’t counted toward future benefit payments, which is completely fair.
Social Security has always operated under a “pay in and collect later” model. Clearly, it’s not a dollar-for-dollar system, but retirement benefits are calculated proportionally based on payroll tax contributions.
Biden’s proposal to tax incomes over $400,000 goes against this system, as wages in that category would be paid into Social Security but not counted toward future benefits. This, frankly, changes the very nature of Social Security, to the point where even members of Biden’s own party may start to push back.
Save now to protect yourself from benefit cuts
One thing current and future Social Security recipients should keep in mind is that the program has faced benefit cuts in the past, and they’ve always been avoidable. There’s a good chance lawmakers will manage to prevent cuts once again and avoid what might otherwise be a massive senior poverty crisis.
But the path to getting there seems complicated this time around. So far, every solution put forth by lawmakers, Biden included, seems to come with a serious flaw attached. So the best bet may be to brace for Social Security cuts — and take steps to make them less problematic.
Current workers have a clear advantage in this regard, as they still have an opportunity to save a portion of their earnings for retirement purposes. Current retirees have fewer options. Many can barely make ends meet on their current income, let alone bank any savings.
But retirees who do have some leeway to save money today should absolutely take advantage of it. We don’t know what the future has in store for Social Security. But it’s fair to assume that even if Biden is elected for a repeat presidential term, his solution to save Social Security is precarious at best.