“Social Security reform” is one of those soundbites you might hear every election cycle without anything ever changing. Politicians have been sounding the alarm for decades, saying that the program — which helps retirees, people with disabilities, and their families stay afloat — is quickly running out of money. So what’s actually at stake?
Social Security is a pay-as-you go system, so taxes collected from today’s workers are spent on current beneficiaries. But because the workforce hasn’t grown as fast as the number of baby boomers entering retirement, there’s more being taken out of Social Security than being put in. The federal government relies on trust funds to fill the gaps, but those reserves are projected to be entirely depleted by 2035, according to the Congressional Research Service.
That doesn’t mean that the government won’t have any money left. But if Congress doesn’t do anything before those reserves are gone, the government will only be able to honor 83 percent of the scheduled benefits, which means that most, if not all, recipients of Social Security will see their household incomes fall. (By 2098, the government would only be able to cover 73 percent.)
That outcome would be disastrous for many. Since it was established in 1935, Social Security has been a hugely successful welfare program, and each year, it helps more than 20 million people stay above the poverty line. It has never before been unable to pay out scheduled benefits. But if Congress doesn’t act, the number of Social Security beneficiaries who live below the poverty line could increase by more than 50 percent by 2045, disproportionately impacting Black and Hispanic families.
None of this is inevitable, and lawmakers will eventually have to do something to address the shortfall. The question is what.
What Democrats and Republicans have proposed
Congress has no choice but to raise revenue, make cuts to the program, or some combination of the two. Democrats have called for raising taxes and, in some cases, expanding benefits, while Republicans have mostly advocated for cuts.
In recent years, however, the GOP has promised that it won’t cut people’s benefits. Over the years, Donald Trump, for example, has advised his fellow Republicans that trying to gut Social Security is bad politics (though he’s also called the program’s disability insurance “a racket”). On the campaign trail this time around, he’s promised to neither “cut one penny from Social Security” nor raise the retirement age, as many Republicans have proposed doing in the past.
But Trump’s promises don’t add up to an actual plan. He proposed reducing spending on Social Security in each of his annual budgets while in office. And despite his promises, he has suggested that he’s open to Social Security cuts this time.
Trump also recently proposed cutting taxes on Social Security payments. That might sound good because people will net more money when they receive their benefits. But the reality is more complicated. The poorest households wouldn’t see any change under that plan because Social Security benefits for those making below $32,000 are already untaxed, while the richest recipients would be more likely to see a tax cut.
For her part, Vice President Kamala Harris has, like other Democrats, promised to preserve Social Security benefits, vowing to shore up the program and make sure it stays solvent. She promises to do so by making “millionaires and billionaires pay their fair share in taxes.”
But Harris’s plan is light on the details, and isn’t exactly clear how the federal government will be able to raise enough revenue.
What might Social Security reform actually look like?
There’s no way around it: Lawmakers have to raise taxes on many families, including those who aren’t millionaires. Right now, any income that someone makes above $168,000 is not taxed for Social Security. That means that higher earners pay a smaller share of their income toward funding Social Security than lower- and middle-income earners.
“People are shocked to learn that rich people don’t pay taxes above” the cap, said Monique Morrissey, a senior economist at the Economic Policy Institute.
To address this, President Biden has tried to reintroduce the Social Security tax on income above $400,000. That weird formula simply boiled down to politics: Biden pledged to not raise taxes on any household making less than $400,000. But it creates what some experts call a doughnut hole — a pile of untaxable income between the cap and $400,000, and on its own, that’s not enough to fill the anticipated budget shortfall. But if Democrats are serious about raising revenue for Social Security, they should start considering raising taxes on everybody. It might not be as unpopular as they fear.
“The Democrats really need to lose that pledge” of not raising taxes on anyone making less than $400,000, Morrissey said. “People are happy to pay more in taxes when it’s something that they see is concretely benefiting them.”
Indeed, polls show that the majority of Americans support raising taxes to ensure they receive Social Security benefits, and only 31 percent would opt for making cuts.
A modest payroll tax increase for Social Security would have little impact on most households and would greatly benefit the program. Moreover, Congress ought to consider expanding the categories of income that get taxed for Social Security, including investment income.
Raising taxes, however, is not an easy task, especially when those taxes are targeted at the wealthy. And if Congress fails to raise enough revenue, then it has to start looking at cuts to benefits. “It’s perfectly reasonable to think about solving a problem with some mix of revenue increases as well as benefit reductions,” said Gopi Shah Goda, director of the Retirement Security Project at the Brookings Institution.
As a cost-saving measure, benefits don’t have to be reduced across the board. If Congress lifts the cap on taxable income, for example, it doesn’t necessarily have to increase the maximum benefit that’s paid out to those who contribute the most into the system. And some of the additional revenue from the new taxes could be targeted to expand benefits for those — like surviving spouses or children — who rely on Social Security the most to stay out of poverty.
Ultimately, a program like Social Security should ensure that none of its recipients fall into poverty, especially because those who are retired or disabled have limited sources of income. That’s certainly a program worth spending more money on — and the majority of Americans agree.
I’d like to hear from you
After the first issue of Within Our Means, several readers reached out to talk about the relationship between disability and poverty, and how programs like Social Security fall short. For a future issue, I’m going to look into the flaws of how we deliver Supplemental Security Income — how hard it is to qualify, for example, or how the requirements make it impossible to save money — and I’d love to hear about your experiences. If you have a story you’d like to share, please send me an email at [email protected].
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