Joe Biden’s top economic adviser offers tough but realistic solution to Social Security’s growing cash deficit

For most retired Americans, Social Security income is something they couldn’t live without. More than two decades of annual surveys from the national pollster Gallup have shown that 80 to 90 percent of today’s retirees rely, to some extent, on their monthly benefit to cover expenses. Additionally, 76% to 88% of non-retirees expect to be able to count on their payments to offset at least part of their retirement costs.

Ensuring the health of America’s best retirement program should be at or near the top of the list for lawmakers on Capitol Hill. Yet reports show that Social Security’s financial health is deteriorating.

Current and future retirees are turning to elected officials to address Social Security’s shortcomings — and it’s starting at the White House with President Joe Biden and his top economic adviser, former Federal Reserve Chair Janet Yellen.

Social Security’s long-term funding gap has surpassed $22 trillion

Before we get into the details of Yellen’s proposal to strengthen Social Security, let’s first address the elephant in the room: Social Security’s crumbling financial foundations.

Every year since the first benefit was mailed to retired workers in 1940, the Social Security Board of Trustees has released a report that examines the financial health of this premier retirement program. In addition to detailing how revenue is collected and where each Social Security dollar ends up, this annual report takes into account changes in fiscal and monetary policy, as well as demographic changes, to estimate Social Security’s financial outlook over 10 years (the short term) and 75 years (the long term) after the publication of a report.

Since 1985, every trustee report has warned that Social Security faces a long-term funding gap. To be clear, this does not mean the program is facing bankruptcy or insolvency. Rather, it means that the existing payment schedule, including annual cost of living adjustments (COLAs), cannot be maintained if things continue on their current trajectory.

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According to the 2023 trustees’ report, Social Security faced an estimated long-term funding gap of $22.4 trillion. Worse still, the Old Age and Survivors Insurance Trust Fund (AVS), responsible for distributing monthly benefits to more than 50 million retirees and around 5.8 million surviving beneficiaries, is on the verge of exhausting its reserves. assets by 2033. With AVS asset reserves exhausted, radical benefit reductions of up to 23% may be necessary to avoid further reductions until 2097.

What didn’t get Social Security in this mess was “Congress stealing funds” or “undocumented workers receiving benefits.” These are some of the biggest myths and lies told on social media chat rooms.

Most of the gaps in social security can be attributed to sustained demographic changes. You are familiar with some of them, such as the retirement of baby boomers and the increase in longevity since payments to retirees began in 1940. However, some of the demographic changes that negatively impact Social Security may not be also visible, such as:

• A historically low birth rate in the United States.

• A decrease of more than half in legal net migration to the United States since 1998.

• Increasing income inequality.

Janet Yellen’s Social Security solution offers a harsh reality to future beneficiaries

Lawmakers on Capitol Hill, including President Biden and his Cabinet, are aware that Social Security’s foundations have weakened. The challenge is deciding how best to “fix”.

During his 2020 election campaign, Joe Biden proposed a four-point plan that relied primarily on taxing the wealthy to generate additional revenue.

In 2024, all earned income (wages and salaries, but not investment income) between $0.01 and $168,600 is subject to the 12.4% Social Security payroll tax. Meanwhile, income earned above this figure is exempt. Biden’s plan would reinstate payroll taxes on earned income above $400,000, which would help generate immediate revenue for the program.

In the president’s State of the Union address to Congress last month, he said: “A lot of my Republican friends want to put Social Security on the chopping block. If anyone here tries to cut Social Security or Medicare, or raise pensions, I’m going to stop them!”

But a conscious reduction in costs, accompanied by an increase in revenues, could be just what the economist ordered.

In 2018, Janet Yellen and four other authors published an opinion piece in THE Washington Post (“A Debt Crisis Is Coming. But Don’t Blame Social Security.”) which offered a tough but realistic way to address Social Security’s growing cash deficit. According to the authors:

Contrary to what President Biden said during his State of the Union address, former Fed Chair Janet Yellen publicly stated that cuts would be necessary. should be part of the solution to strengthen social security.

A bipartisan approach to solving Social Security’s cash shortfall makes the most sense

Keep in mind that “cutting Social Security” doesn’t mean taking the proverbial scissors to retirement benefits. Reducing spending would mainly involve gradually raising the full retirement age to 70 for future generations of retired workers. “Full retirement age” is when you become eligible to receive 100% of your retirement benefit.

If the full retirement age is gradually pushed back, future retirees will either have to wait longer to receive 100% of their benefits or accept a larger reduction to claim their benefits sooner. Either way, the goal would be to reduce the amount of lifetime benefits the program pays to workers.

The prospect of reducing lifetime benefits is a real kick in the pants given the number of people covered by Social Security each year. But with the full retirement age increasing by two years since the launch of the program, compared to an increase in life expectancy of around 13 years over the same period, there would be a logical behind this proposal.

Ultimately, Social Security would be strongest if the approach was bipartisan.

Although gradually raising the full retirement age would reduce spending in the long run, it would take decades for the program to realize those savings. This means that the Republican approach to cutting spending does nothing to address the expected depletion of AVS asset reserves by 2033.

On the other hand, calls from President Biden and Democrats to increase payroll taxes on high earners would immediately increase revenues and later push back the exhaustion date of AVS asset reserves. What taxing the rich fails to do is eliminate Social Security’s long-term funding gap. In fact, Biden’s four-point plan reappropriates much of the revenue from taxes on the wealthy and pushes back the depletion date for AVS asset reserves by just five years.

The fact is that Social Security’s best chance for success lies in integrating the essential elements of both Republicans and Democrats into one bill. This is what happened with the Social Security Amendments of 1983, and it is likely what is needed to ensure the financial health of this program for generations to come.

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Joe Biden’s top economic adviser offers tough but realistic solution to Social Security’s growing cash deficit, originally published by The Motley Fool