Story at a glance
- The Urban Institute released a study that suggests Biden’s tax plan could help keep Social Security funded.
- Federal aid programs face major financing challenges amid the pandemic and recession.
2020 Democratic presidential hopeful Joe Biden’s tax plan for Social Security and Supplemental Security Income is projected to help 1.4 million Americans out of poverty within its first year of implementation, according to an analysis conducted by the Urban Institute.
A key element of Biden’s plan is imposing Social Security taxes on income above $400,000. Under the current guidelines, employees and employers each pay taxes of 6.2 percent on earnings up to $137,700.
Some of the other hallmark features of Biden’s plan include increasing minimum benefits to 125 percent of the federal poverty level, amounting to $15,950 annually in 2020, readjusting how cost-of-living adjustments are determined, and giving credits to caregivers for children younger than 12 or family members with disabilities.
The plan would also allow widowed beneficiaries the option to collect 75 percent of the total benefit their households’ received before the death of their spouse, provided it isn’t higher than the benefit received by a two-earner couple with average earnings over the course of their careers. Social Security now offers survivor benefits equal to 100 percent of the deceased spouse’s benefit, which replaces the surviving spouse’s benefit if the deceased spouse’s benefit generates a larger payment.
Biden’s proposal would increase Social Security revenue by 7 percent in 2021, 12 percent in 2040, and 16 percent more in 2065 as opposed to current law. Total taxes paid in 2021 would increase by just 1.1 percent, according to the report.
“Social Security faces a serious financial problem and the next president is going to have to deal with this,” Richard John, a senior fellow at the Program on Retirement Policy at the Urban Institute, told Yahoo Money. “It’s getting to the point now where they’re going to have to act sooner through tax increases or cuts to Social Security.”
In 2019, 12.8 percent of adults over age 65 earned below the federal poverty level.
Yahoo’s summary of the Urban report notes that Biden’s plan does not solve the long-term financing issues for Social Security, which are struggling against the backdrop of the COVID-19 pandemic and its subsequent recession. Instead, his plan delays them, with the Urban analysis estimating that by taxing income above the $400,000 mark, Biden would extend the life of the Social Security trust funds by five years longer than anticipated.
The study concluded that Biden’s plan could preserve the surplus in Social Security funds longer and close about 70 percent of the funding gap, if it did not include new features like the new cost-of-living adjustments.
“While the intentions are to raise revenue to preserve the program, to prevent the surplus from running out too soon, and to have enough income to cover the expenses, the report indicates that spending of the program will significantly increase under Biden’s proposal,” said Chad Parks, Founder and CEO of Ubiquity Retirement + Savings, to Yahoo Finance. “It is a step in the right direction, but frankly, kicks the can down the road again.”
President Trump has said little about his tax plans for a second term. But he has said that if he is reelected, he wants to forgive taxes that were postponed under his payroll tax deferral. Such a move would require congressional action.
Under the deferral, employers can stop withholding the 6.2 percent Social Security tax from the paychecks of workers who earn less than $4,000 every two weeks from Sept. 1 to Dec. 31. The taxes will need to be repaid next year if they are not forgiven.
Democrats have expressed concerns that Trump’s payroll tax deferral and forgiving the deferred taxes would hurt Social Security. Trump’s allies have said that if the deferred taxes are forgiven, money would be transferred from the general fund to the Social Security trust funds to make the trust funds whole.
“I haven't seen anything discussed on Social Security reform,” Andrew Biggs, a research fellow at the conservative-leaning think tank AEI, told Forbes. “The president has argued against any Social Security benefit cuts but hasn't waded into how Social Security's long-term funding should be secured.”