Biden’s tax pledge could spark a compromise on Social Security reform
It’s rare when news that a major government program facing $20 trillion in deficits is greeted by demands to expand that very program. And yet that’s how the 2022 Social Security Trustees Report, released on June 2, was received, with progressive politicians and activists calling to increase benefits.
But the biggest obstacle to expanding Social Security isn’t congressional Republicans but President Biden himself, who opposes the payroll tax rate increases that progressive Social Security plans depend upon. Biden’s stance opens the door to sensible bipartisan solutions.
Social Security is the largest federal spending program, levying the largest tax most workers pay and providing the largest source of income to most retirees. The 2022 Trustees Report projects that Social Security is underfunded by 20 percent over the long term, with its trust funds running dry in 2034. There is no magic solution, just the unpalatable choice between higher revenues and lower benefits.
Congressional Democrats have seemingly reached a consensus: Social Security reform should consist not of 100 percent tax increases, but of more than 100 percent. The Social Security 2100 Act, co-sponsored by 89 percent of House Democrats, would increase taxes to pay full scheduled benefits, then raise taxes even further to boost benefits for all retirees. Tax increases would be split roughly equally between phasing out the $147,000 maximum salary subject to payroll taxes and ramping up the payroll tax rate from 12.4 percent to 14.8 percent.
Republicans object to Social Security tax increases for both economic and philosophical reasons. But since the failure of George W. Bush’s 2005 reform effort and even more so following President Trump’s election, the GOP avoids endorsing the benefit reductions needed to avoid these tax increases.
But progressives face an even more important roadblock: President Joe Biden, who pledges that “nobody earning less than $400,000 a year will pay an additional penny in new taxes. Nobody.” This leaves Congressional Democrats in a fix: without payroll tax rate increases the Social Security 2100 Act adds just five years to Social Security’s solvency, making it not even the 2040 Act.
But President Biden’s stance may actually make Social Security reform more likely. The reality is that nothing like the Social Security 2100 Act can pass. Neither would a comparably-conservative Social Security reform. George W. Bush, holding the presidency and Congress, could not pass a Republican-only Social Security plan. Barack Obama, with overwhelming Congressional majorities, passed the Affordable Care Act only by the skin of its teeth. The U.S. political system’s checks and balances simply make passing any significant partisan legislation exceedingly difficult.
As James Madison said, the U.S. political system is built on “compromise, compromise, compromise.” The sooner we get there the better.
Progressives will have to accept benefit cuts. But that’s easier to do than they might imagine.
According to my calculations of Social Security Administration data, the average new retiree in 2020 received a benefit 32 percent higher than 20 years prior, even after inflation. Moreover, Social Security’s benefits are particularly generous for high earners. In 2021, the maximum Social Security benefit was $37,881 annually, compared to $11,456 in New Zealand, $13,150 in Australia, $11,608 in Canada, and just $11,141 in the United Kingdom. It’s hard to argue that no savings can be had from benefits.
And yet restraining benefits won’t be enough, either financially or politically. Conservatives will have to swallow some tax increases, but some creativity may be required. One idea is to limit the federal tax preference for retirement plan contributions and redirect the savings to Social Security. The Congressional Budget Office estimates a roughly $275 billion annual cost of the retirement tax preference, which would be enough by itself to fill the 75-year Social Security deficit.
Yet many economists question how effective the tax preference is in encouraging retirement savings. That job could be left to far cheaper policies such as providing universal access to workplace retirement plans and automatically enrolling employees.
The U.S. does not need to endlessly increase Social Security benefits, even as retirement savings reach record highs and poverty in old age falls to record lows. Nor should it spend massive amounts subsidizing retirement savings by high earners who would save regardless. But the U.S. does need to maintain a robust safety net against poverty in old age and to ensure that every employee has a retirement plan at work. All of this can happen if members of Congress aim for the achievable rather than the impossible.
Andrew G. Biggs is a senior fellow at the American Enterprise Institute and former Deputy Commissioner of the Social Security Administration.