October 14, 2020

Joe Biden’s Social Security Plan Reduces Elder Poverty But Doesn’t Fix Trust Fund Insolvency, New Report Says

Joe Biden’s Social Security Plan Reduces Elder Poverty But Doesn’t Fix Trust Fund Insolvency, New Report Says

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What’s Joe Biden’s plan for Social Security? We’ve known the broad contours for a while: boost the Social Security minimum benefit, eliminate the WEP and GPO that aim to prevent double-dipping, add a dedicated surtax for earners with over $400,000 in income. Now, a new report at the Urban Institute fills in the details.

In the first place, yes, Biden would create a new tax on earnings above $400,000. Because this doesn’t increase with inflation, the gap between the existing contribution ceiling (now $137,700) and the new tax level would gradually close. Assuming average wages rise at 3% per year, the gap would be closed in 36 years; a period of high inflation would close it sooner. Unlike some other proposals in which surtaxes provide additional Social Security accruals, however trivial the amount, this new tax would not.

Does this tax hike solve the pending Social Security Trust Fund’s pending insolvency? Not really — rather than the fund being emptied in 2035, in its current projection, it would last 5 years longer, to 2040.

Wait, what?

In the short term, tax revenue would grow by 7% in 2021; this would gradually increase over time as the threshold for the surtax decreases in real terms over time. By 2040, the revenue would increase to 12% more than otherwise, and by 2065, to 16% more than otherwise, as the gap between the Social Security wage ceiling and the surtax level is fully closed. This means that the short-term and the long-term impacts of Biden’s plan are quite different, and over the standard 75 years in which Social Security’s projections are calculated, Biden’s tax increase would shrink the financing gap, currently 2.59% of taxable payroll, by 1.84% of taxable payroll, or about 70% of the cumulative shortfall over time.

At the same time, most of the tax hike would be spent on benefit increases. What’s left over would only reduce that shortfall by about a quarter, or 0.68% of taxable payroll.

Here’s how that breaks down:

Biden’s proposal increases the minimum benefit up to 125% of the single-person poverty level, which amounts to $15,950 in 2020, for all workers with 30 years of earnings history, and prorated amounts for those with less. (Because this would be on a per-person basis, but the poverty formula only increases 35% for a second person, this means that a two-person household would have a minimum of 185% of the poverty level.) Over time, this would increase, relative to inflation, because it’d be indexed to wages, which, on average, increase at higher rates. It would not be retroactive, so its costs and benefits would be gradual.

Biden would also adopt the CPI-E, or the experimental elderly-specific inflation index, which would increase the annual COLA adjustment by 0.2% per year, according to calculations.

Biden would implement caregiver credits for workers with children under 12 or family members with disabilities, giving them a credit equal to half the average wage in addition to their actual earnings, phased out with higher earnings and eliminated with earnings at the average earnings level. (This report is the first I’ve seen that provides this specific detail.)

Biden would boost surviving spouse benefits up to 75% of the combined household benefit, replacing current provisions that set the surviving spouse at the greater of the two spouse’s benefits. This would provide a form of “marriage bonus” relative to two unmarried recipients sharing household expenses. (Recall that the existing survivor’s benefit, in being aimed at widows without substantial income of their own, functions as a somewhat crude form of “caregiver” benefit.) The benefit boost would only be limited to that of a hypothetical couple each with average career earnings.

Biden would eliminate the Windfall Elimination Provision and the Government Pension Offset, which those affected by the reductions decry, but these serve to prevent a form of double-dipping.

Finally, Biden would increase benefits by 5% of the average benefit, for those who have been collecting benefits for 20 years, with a 5 year phase in for those with 16 years. This is justified by concerns that the oldest retirees are most at risk of having spent down their savings, and most likely to have additional medical or caregiving costs, though the benefit boost doesn’t take into account any particular retiree’s needs.

Of these, the COLA increase is the most costly, at about 0.4% of taxable income, and each of the remaining items is somewhere between 0.1% – 0.2%.

In addition to the Social Security boosts, Biden would also increase Supplemental Security Income (SSI) benefits.

As it stands, SSI is a program not just for the very poor elderly but for poor disabled Americans as well; in fact, only 28% of SSI recipients are elderly. For an individual with no other income, the annual benefit is $9,408 for an individual, $14,110 for a couple, which amounts to about 74% or 82%, respectively, of the poverty level, though, in addition, SSI recipients would be eligible for food stamp/SNAP benefits which would bring them to 93%/108% of poverty, as well as Medicaid benefits to cover medical costs. The program is available to low-income Americans of age 65 or older (that is, at a younger age than the full retirement age of Social Security itself); non-citizens generally do not qualify.

Biden’s plan would increase benefits to 100% of the single-person poverty level; for couples, benefits would be doubled rather than only increased 50%. He would eliminate the reductions for beneficiaries who live in someone else’s home “for free” (that is, living with a child/family member without paying anything for room or board), and boost the asset limits in the eligibility test. Now, as it stands, “100% of poverty” on a net-income basis (that is, after making certain reductions for a household’s expenses) is exactly the cut-off for SNAP eligibility, so whether it’s all a wash or the eligibility is adjusted is unclear.

Taken in total, do these changes “work”? The Urban Institute analyzes them in a couple ways, first by assessing the degree to which lower income workers would benefit, relative to the rest — over 50% of the caregiver credits’ benefits would go to the bottom fifth when fully phased in in 2065, for example, and nearly 50% of the minimum benefit expansion. (Why this wouldn’t exclusively benefit the poorest, isn’t clear to me.) At the same time, less than 5% of the WEP/GPO repeal’s benefit increase would go to the bottom fifth.

Additionally, they calculate impacts of these changes on the poverty rate for those over age 62 or receiving Social Security benefits due to disability. Without changes, the existing poverty rate in 2021 would be 8.1%; with Biden’s Social Security changes, it would fall to 7.4%. With his SSI changes, it would drop to 5.8%. In 2065, the current-law old/disabled rate is forecast to be 5.0%. With his Social Security changes, it would drop to 2.9%. With is SSI changes as well, it would be 2.1%. (Why won’t it drop below this level? It appears that they include “adults over 62,” which would include Americans too young for SSI as well as non-citizens.)

Now, I’m a supporter of some of these basic changes that boost minimum benefits, but I can’t figure out for the life of me why Biden would propose a plan which doesn’t solve the fundamental issue of the insolvency of the trust fund and the need to shore up the finances through a dedicated tax or, if not, the legislative authorization of the funding of deficits through general tax revenues. Perhaps the lack of any further funding proposals simply means that, however much Social Security advocates periodically proclaim that general revenue-funding would be the death-knell of the program, Biden and his team simply expect this to be the ultimate solution. Or perhaps this simply signals that there is no appetite for any more comprehensive reform as long as it can possibly be avoided, until the day of reckoning finally arrives and the legal authority for paying out full benefits vanishes, whether that’s in 2035 or 2040, or potentially much, much sooner.

As always, you’re invited to comment at JaneTheActuary.com!

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