During his State of the Union address, President Biden challenged Congressional Republicans to pledge to leave Social Security alone as the nation’s budget gets hammered out. This challenge was smart politics —the program is a popular one, particularly among seniors, who turn out to vote in large numbers.
Some high-profile Republicans had been—and some continue to be—banging the drum for cutting Social Security. And while their plans essentially seek to undermine support for the program, particularly among younger adults, the basic critique is accurate: The program is spending more than it generates in revenues. Unless something is done, in a decade or so the program may have to cut back benefits.
Here is the situation. Social Security is financed primarily by payroll taxes on employers, employees, and the self-employed. In addition to tax revenues, Social Security trust funds also receive intragovernmental interest payments on the Treasury securities they hold. Those securities were purchased because, until recently, Social Security was running annual surpluses and those revenues were used to purchase U.S. Treasury securities. However, once the revenues coming in did not match the money being paid out to Social Security beneficiaries, the program had to start cashing in its securities.
If current law remains in place, according to the Congressional Budget Office (CBO), the Social Security trust funds are projected to be exhausted in the calendar year 2033. When the trust funds are exhausted, then the Social Security Administration would still be able to pay some benefits, but it would not have the authority to make payments in excess of the payroll taxes received each year.
Thus, it would have to reduce benefits.
So, what should be done? Some Republicans are arguing that now is the time to cut back spending on the program. Florida US Senator Rick Scott floated a plan to have all federal programs expire after five years and thus trigger a re-write of programs that lawmakers wish to extend. He later backed off that plan, saying that he did not mean that Social Security and Medicare should be sunset. Former Vice President Pence has said that everything should be on the table when considering changes to Social Security.
Something must be done. An idea being pushed by Vermont US Senator Sanders goes after one big loophole in how Social Security is funded. In 2022, only income up to $147,000 was subject to the Social Security tax. That number goes up with inflation and is expected to be $160,000 this year, but there are many people that make more—and some a lot more—than $160,000.
Sanders raises the question, why should their income be exempt from taxation?
According to the CBO, just that increase could generate enough revenue to push off the date that Social Security revenues fail to adequately cover expected expenses.
According to Senate Democrats, applying the payroll tax on Americans’ earnings above $250,000 per year and changing the tax so it also applies to investment income as well, would extend the program’s life span by 75 years.
A cap on taxable earnings has existed since the inception of the Social Security system in 1937.
The maximum taxable amount reflects the original purpose of the program: to provide workers with a “safety net” of retirement income. Over the years the cap was increased in order to help maintain the program’s solvency.
But Sanders raises an important question – why have a cap at all?
After all, much has changed over the past 85 years. The wealth gap has meant that those with the highest income have more of their income exempt from Social Security taxation. When payroll taxes for Social Security were first collected in 1937, about 92 percent of earnings from jobs covered by the program were below the maximum taxable amount. In 2020, about 83 percent of earnings from employment covered by Social Security fell below the maximum taxable amount. In short, the cap itself makes the tax regressive.
It is clear that the cap must be changed, but the first question should be whether to have one at all.
Approximately 67 million Americans receive benefits under the program. That’s about 1 in 5 people. Without Social Security, 22 million more Americans would be below the poverty line, including almost a million New Yorkers. The average benefits are quite modest, around $1,670 per month. Any reduction in benefits would result in more people being forced into poverty.
As with any financial problem, the longer one waits, the more difficult the choices. The same is true now. So, doing nothing may be smart politics, but leaving the problems to fester will make future policy options worse.
Whistling past the graveyard can’t solve the Social Security problem. Acting, and acting quickly, can.