Update 457– Third Rail Alive and Well
So Social Security Insolvency is Soluble
For all of Donald Trump’s disruptions of economic norms, from tariffs to monetary policy, he has stayed far away from entitlement reform. George W. Bush attempted the last structural reform in 2005 when he proposed privatizing a third of Social Security. No hearings were held in Congress. Republicans saw it as politically toxic and no one would vote for it.
Trump’s eroding base is seniors — and his forbearance on entitlements plays to his base. But on his watch, policy choices have brought us another step closer to insolvency of the Social Security Trust Fund. More below.
Last Friday, the House Ways and Means Subcommittee on Social Security held a hearing on the impact of the coronavirus crisis on the future of Social Security. The Chief Actuary of the Social Security Administration (SSA), Stephen Goss, testified that the pandemic has accelerated the fund’s insolvency point. The Social Security Trust Fund, the funds will now be insolvent by 2034 at the latest.
Social Security’s insolvency problem is due to political inaction, not lack of solutions. Democrats have proposed numerous commonsense, popular reforms to protect one of the best-loved programs in the nation and ensure generational equity.
Below, we examine the future of Social Security, the paths to secure its solvency, but also how new beneficiaries may be shortchanged.
Social Security in the Trump Era
The future of Social Security is once again uncertain. Payroll taxes on regular income primarily fund the program, but this year, payroll tax liability and earnings will likely be at least 10 percent lower than expected. With rising coronavirus cases and deaths, states are halting or reversing their reopening plans, further reducing payroll taxes. Now, expectations for Social Security insolvency have accelerated from 2035 to 2034. Once Social Security is insolvent, recipients will only receive 79 percent of their earned benefits.
Insolvency or further cuts to Social Security will have a devastating impact on seniors and other beneficiaries who rely on those funds to survive. Social Security provides a modest monthly income to seniors, disabled individuals, and surviving spouses, with annual payments averaging around $17,000. Three-fourths of Social Security recipients are retired workers, and forty percent of retirees rely solely on Social Security for income. The National Institute on Retirement Security estimates that Social Security has kept 1.4 million children and at least 10 million seniors out of poverty.
Trump has demanded inclusion of a payroll tax cut in the next coronavirus package, and presidential economic advisor Stephen Moore stated that Trump will refuse to sign the bill without the tax cut. A payroll tax cut is not only poor relief and poor stimulus but would also create additional deficiencies for Social Security funding.
The 60-Year Hitch
Due to coronavirus, retiring seniors are facing an impending cliff. Social Security benefits for newly eligible workers are calculated using the Average Wage Index (AWI), which typically advantages recipients by ensuring that payments grow as wages increase over time. However, average wages have dropped precipitously during the pandemic as millions of people lost their jobs. For workers turning 60 this year, this means their total benefits will be 9.1 percent lower than expected at the beginning of the year.
Chair John Larson, who organized Friday’s hearing, introduced H. R. 7499, the Social Security COVID Correction and Equity Act, which would ensure that newly eligible retirees don’t receive lower benefits than those who became eligible the previous year. The bill would also increase benefits and decrease income tax liability for recipients for the year 2020.
We’ve Seen This Movie (Spoiler Alert)
Congress last addressed Social Security’s solvency in 1983 when it passed a balanced package of reforms including both tax increases and modest benefits cuts. These reforms guaranteed the program’s solvency for another 50 years. As this economic crisis persists and reforms to Social Security become more urgent, legislators should consider these revenue raising proposals:
- Raising or Eliminating the FICA Cap: One way to raise revenue is to increase or eliminate the cap on taxable wages, which prevents income above a certain threshold ($137,700 in 2020) from being subject to Social Security tax. The Social Security payroll cap has been raised many times. And in 1994, policymakers eliminated the Medicare payroll tax cap. Changes to the tax cap would significantly mitigate the erosion of the Social Security tax base and only impact the highest-earning workers.
H.R. 860, the Social Security 2100 Act would subject incomes above $400,000 to Social Security payroll taxes, among other changes.
- Taxing Unearned Income: Unearned sources of income such as capital gains or dividends are currently excluded from the payroll tax, leaving a large, untapped source of revenue for Social Security. Taxing capital gains as ordinary income or a new Net Investment Income Tax could shore up the Trust Fund within a decade.
- Expanding the Payroll Tax: An increasing portion of workers’ compensation is not paid in wages but fringe benefits. These include employer-sponsored health insurance premiums and “cafeteria plans,” which are generally exempt from the payroll tax. Expanding taxable wages for Social Security increases payroll tax revenue and benefits for most workers. Per the Center on Budget and Policy Priorities, this change could lower the poverty rate among Social Security beneficiaries by 15 percent.
- Raising the Payroll Tax Rate: A payroll tax rate increase’s effect depends upon when the rate increases and by how much the rate is changed. As we approach insolvency, the window for a gradual payroll tax increase closes and a higher payroll tax will be required. Postponing Social Security reform until insolvency is imminent will require a permanent and immediate 4.13 percentage point increase in the payroll tax, raising the tax rate to 16.53 percent according to the 2020 Board of Trustees Report.
A combination of these proposals would effectively ensure Social Security’s survival. Progressives should consider using this opportunity to pursue a more expansive, affirmative agenda to establish a more equitable tax system and raise much-needed revenue.