Biden Wants to Shore Up and Expand Social Security. His Tax Pitch Is Likely a Nonstarter. - Barron's

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President-elect Joe Biden has made a number of proposals to shore up Social Security and expand benefits to the lowest-income recipients. Now his ideas are about to meet a divided Congress.

The Social Security Trust Fund is expected to be exhausted sometime around 2035 without additional funding or cuts to benefits. Biden has promised to extend its solvency by requiring high earners to pay taxes on more of their earnings.

His plan would impose a 12.4% Social Security payroll tax on income earned above $400,000, split between employers and employees. This would mean that wages between $137,700, the current wage cap, and $400,000 aren’t taxed. The wage cap will rise to $142,800 in January.

Policy Primers

Taxing earnings above $400,000 would boost Social Security revenue 7% in 2021 and 12% in 2040, the Urban Institute says. The tax would keep the trust fund solvent until 2040, it says, but future tax increases or benefit cuts would be needed to keep the program solvent beyond that, it says.

Still, observers say it’s unlikely Congress will approve tax increases to address the program’s solvency until the last minute.

“There is very little chance that until Congress feels that its back is against the wall it is going to do anything like raise Social Security taxes,” says Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center. “If they can’t agree on a stimulus bill during a pandemic, it’s hard to imagine that they’re going to do Social Security reform 14 years before it becomes insolvent.”

Biden’s other plans for Social Security include: strengthening benefits for the most vulnerable Americans by increasing monthly payments for those who have been receiving benefits for at least 20 years; implementing a minimum benefit for lifelong workers to ensure that they’ll get a benefit of at least 125% of the poverty level; protecting widows and widowers from steep cuts in benefits by permitting a surviving spouse to keep a higher share of a deceased spouse’s benefits; and ending provisions that reduce or eliminate benefits for those who worked in a job in which they qualified for a pension and didn’t pay Social Security taxes.

In addition, Biden’s plan would increase overall benefits by shifting the index for calculating annual cost-of-living benefit adjustments to the consumer-price index for the elderly, or CPI-E, from the current consumer-price index for wage and clerical workers, or CPI-W. The CPI-E index usually grows faster than the CPI-W and more accurately captures annual changes in the price of goods and services that retirees purchase, such as health-care-related items.

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There’s more appetite for those proposals than for raising the payroll taxes, Gleckman says. “The problem is that they can’t do that without coming up with some revenue or cutting somebody else’s benefits,” he adds.

Even if Democrats gain control of the Senate by winning Georgia’s two seats that are up for a run-off in January, some observers think a payroll tax would be difficult to push through.

The message for savers, says Ed Slott, a certified public accountant and retirement expert in Rockville Centre, N.Y., is that “you’re on your own here; you’re not going to get a lot of help from the government.” The old notion of the three-legged retirement stool—Social Security, pensions and personal savings—has been crumbling for years, he says. “It always comes down to earn more, save more and spend less.”

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