Weighing Social Security policies and politics
April 1, 2019
Congressional Democrats are pushing an ambitious plan to expand Social Security and put it on a sustained long-term footing in an effort to overturn 20 years of attempts by congressional Republicans to scale back entitlement programs like Medicare and Social Security.
The New Deal social insurance program had been one of the primary targets of former House Republican Speaker Paul Ryan, R-Wis., since his arrival in Congress in 1999. Ryan always believed Social Security “is an undeserved entitlement,” and lawmakers have often suggested that it’s responsible for federal budget deficits and sluggish economic growth – both of which are questionable viewpoints.
Now, with Ryan’s departure from Congress and the House Democrats takeover, lawmakers recently introduced what could be the most significant changes in the program since 1983, when Congress stepped in to avert a financial crisis by raising taxes and the eligibility for Social Security. The new legislation which has gathered a near majority 200 co-sponsors (but only Democrats so far) would be a sea change after decades dominated by concern that aging baby boomers would bankrupt the government as they begin drawing benefits from Social Security and other entitlement programs.
For most Americans, Social Security remains the bedrock of their retirement with the program serving nearly 90 percent of Americans over age 65.
What the Democrats have in mind addresses the Social Security program in a number of ways. It would make the program more relevant to today’s workers by increasing benefits for all retirees, improving cost-of-living increases by changing the formula and increasing the minimum benefit for the lowest-income households.
Last year, roughly 63 million people received a total of $1 trillion in Social Security benefits. But the number of recipients is expected to surge to 80 million over the next 10 years. When it was last changed in the 1980s, the benefits were supposed to be part of a package providing income to retirees along with company pensions and personal savings.
But that reality has changed as many Americans have used up their savings, helping their children go to college or helping a family member deal with illness. Many people have no private pensions and many have meager or no savings. In fact, about a third of all retirees rely on Social Security as their only real source of retirement income and at least half of all Americans rely on it for more than half of their retirement income.
Even with most Americans feeling more financially secure than they did five years ago, many are struggling to set aside any type of savings. A new report from the Federal Reserve found that about 40 percent of adults said if faced with a $400 unexpected expense, they would either not be able to pay it or would do so by selling something or borrowing money.
The bill represents Democrats’ vision of social insurance, finding a way to improve retirement security for American workers and putting a real security net behind those on Social Security. To do that, the bill puts modest tax increases on middle and working class workers and much sharper increases on the wealthy. It would cut federal income taxes on Social Security benefits for about 12 million middle-income people while raising taxes elsewhere.
Everyone pays payroll taxes up to a ceiling of $132,900, currently at a rate of 12.4 percent of wages and salary income split evenly between you and your employer. That works out to a maximum for workers of $16,480 or 1.64 percent of your wages if you were to earn, say a million dollars.
But newly-minted Ways and Means Social Security Subcommittee Chairman John Larson, D-Conn., is proposing to raise everyone’s payroll tax from 12.4 percent to 14.8 percent over the next 24 years. This would raise a significant amount of money to stabilize the Social Security program. It would mean slightly lower taxes for middle and lower-income workers but a sharp increase for anyone who earns over $400,000.
Without any action from Congress, Social Security Administration actuaries warn the program will soon be spending more than it takes in and the trust funds for retirement and disability benefits will be depleted by 2034. That’s because of a number of factors including an aging population of baby boomers, longer life spans, lower birth rates and the widening income gap.
To be clear, Social Security not having money left in its asset reserves doesn’t mean the program is bankrupt or insolvent. It just means that the existing payout scheduled isn’t sustainable over the long run. This legislation is designed to fix that. Social Security Trustees project that beneficiaries will see a 21 percent cut in benefits by 2034 unless Congress takes action to prevent the funding shortfall. The Congressional Budget Office’s estimates the year at 2031.
Details, details and more details
The Larson bill hopes to keep the Social Security system funded permanently. Another piece of legislation along the same lines, but with different provisions, has been introduced by Sen. Bernie Sanders, I-Vt., a 2020 presidential candidate and his bill has been joined by other presidential contenders including Sens. Cory Booker, D-N.J., Kirsten Gillibrand, D-N.Y., and Kamala Harris, D-Calif.
Larson’s bill would change benefits, update the cost of living adjustments and fix those long-term funding issues. It would increase benefits for those who have paid into the system almost across the board. It would apply about 25 percent of the money raised to increase benefits, and the rest would cover projected deficits in the Social Security trust over the next 75 years.
That means Social Security would be able to pay all benefits for at least the next 75 years, but in practical terms, in the post-baby boom time period, its financial condition would keep improving, so it solidifies the program long-term. The trust fund would reach a steady value of $2 billion in today’s numbers, by 2063 and stay there – which would allow it to provide a cushion of about 2.5 times annual benefits.
It would also raise the annual cost-of-living adjustment (COLA) to ensure the system tracks retirees’ spending needs, better reflecting their spending habits. The taxation of Social Security benefits would also be updated, reducing a tax burden on many retirees.
The bill would also increase the minimum benefit, which was established in 1972 for the lowest-income workers. Right now that benefit works out to about $830 a month or $9,960 for workers with 30 years of earnings – way below the federal poverty level.
Almost no one has qualified for it since the 1990s. The legislation would raise the minimum to 125 percent of the federal poverty line, which would set it at about $15,175 a year.
The politics of Social Security reform
What remains to be seen is whether this formula will be able to get bipartisan support, thus guaranteeing its success in Congress. Democrats have enough votes in the House to get the measure through that body, but will need bipartisan support to get any significant legislative changes through the U.S. Senate.
The legislation has generated sharp criticism on a number of fronts. Some suggest it benefits middle and upper income retirees who don’t need the help and significantly raises payroll taxes on workers.
After contentious bitter fights over the Affordable Care Act and the already developing intra-party divide among Democrats over “Medicare for All,” a single payer health care plan, Congressional Democrats are relishing the opportunity to rally around Social Security. Larson even introduced the bill on the 137th birthday anniversary of President Franklin D. Roosevelt, standing in front of a life-size cardboard cutout of him.
With every political solution, there are always winners and losers. Republicans continue to push for a gradual increase to the full retirement age at which you become eligible to receive your full monthly benefit. Currently, that is age 67 for those born in 1960 or later. But the GOP has called for a gradual increase up to age 70 for full retirement benefits in order to counteract increased longevity.
They are gambling that the age increase would reduce lifetime benefits paid out by the program by either persuading workers to wait longer to claim benefits, or to take an even sharper monthly reduction by claiming benefits earlier. While this would protect current and soon-to-be-retired seniors, it would reduce the lifetime benefit potential of future generations of workers.
In the Senate, Democrats Richard Blumenthal, D-Conn., and Chris Van Hollen, D-Md., are leading a push for a version of the Larson bill. But last October, Senate Majority Leader Mitch McConnell, R-Ky., called Social Security and the government’s other social insurance programs, Medicare and Medicaid “the real drivers of the debt” and called for them to be adjusted “to the demographics of the future.” (Translation: cutting benefits.)
McConnell and other conservative lawmakers want benefits cut by raising the retirement age and imposing stingier cost of living adjustments. Still another group of conservative Republicans have long advocated privatizing Social Security completely. In 2005, then-president George W. Bush., made a partial privatization effort his top domestic priority, but a strong backlash from seniors, steady opposition from Democrats, and the severity of Hurricane Katrina, led the Bush administration to pull the idea altogether.
The Trump administration does not appear to be in line with McConnell’s approach. Instead, in the 2020 fiscal year budget proposal released in March, the White House has made a clear trade-off. It wants to gut the nation’s social safety net to give more funding to the nation’s defense programs and allow for tax cuts that primarily benefit corporations and America’s wealthiest. The administration is proposing sharp cuts to Medicare and modest cuts to Social Security to fund programs Trump campaigned on – protecting and increasing defense and border security spending.
With a divided Congress, a strong vote for the bill in the House, combined with political pressure in the lead-up to the 2020 presidential election, could create momentum for a Senate vote. But that kind of a vote also has potential consequences for lawmakers. A Republican push for cuts and age increases for Social Security could have negative impacts on working age voters, the very voters that Congressional Republicans and Trump need for re-election in 2020. At the same time, the Democratic plan of expanding Social Security costs the wealthy, who conveniently are important campaign donors. Either way this fight is a 2020 campaign issue.
Also contributing to this column were: New York Times, Los Angeles, Times, Motley Fool and Vox.