In 2021, Social Security is expected to begin drawing down its trust fund to cover benefits instead of tapping only the interest.
Unless Congress acts, benefits will be cut at least 20% when the trust fund runs out of money in 2033 — two years sooner than previously projected — according to the Center for Retirement Research at Boston College. At that point, the program will rely entirely on payroll taxes, which currently aren’t enough to fully fund Social Security.
President Joe Biden wants to expand Social Security in two ways. He would raise benefits for the people most in need: low-wage workers, surviving spouses of dual-earner couples, caregivers, government workers and those who have been collecting Social Security the longest. (The rationale for that last group? Seniors have higher medical and long-term care expenses later in life.)
Everyone else’s benefits would remain the same, but their Social Security cost-of-living adjustments would increase because Biden supports switching to the Consumer Price Index for the Elderly. The CPI-E is considered a better measure of inflation for older adults because it weights senior citizens’ biggest expenses, such as health care and housing, more heavily. The Social Security Administration estimates that switching to the CPI-E from the current wage earners index will raise annual COLAs 0.2 percentage points, on average.
To pay for these changes, Biden wants to increase Social Security payroll taxes on people earning more than $400,000 a year, a short-term fix that would also shore up the program for only another five years, predicts Melissa M. Favreault in a written analysis for the Urban-Brookings Tax Policy Center. She is a senior fellow in the Income and Benefits Policy Center at the Urban Institute.
Proposed legislation from Rep. John Larson, a Democrat, would secure the program’s funding for 75 years. Along with the increase on those earning more than $400,000 that Biden has proposed, the bill calls for raising the payroll tax for everyone, with employees and employers each contributing an additional 1.2%, or roughly 50 cents more per week, estimates Social Security in an independent analysis of the bill. The increase would be phased in between now and 2043.
In a divided Congress, Democrats and Republicans could find common ground with smaller bills, such as one to reinflate Social Security benefits for people born in 1960 or 1961, says Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare. Their benefits will be cut unintentionally by a formula glitch and the 2020 recession.
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Catherine Siskos is managing editor at Kiplinger’s Retirement Report. For more on this and similar money topics, visit Kiplinger.com.
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