Social Security continues to be an important source of retirement income. Increases in monthly checks are linked to the consumer price index, which have lagged behind what seniors spend most of their income on. So, for 2021 it appears the best recipients can hope for is just a one percent increase, the lowest in years.
The Biden campaign, however, wants to court the elderly vote with its own plan for Social Security. The plan calls for “a higher benefit for the oldest Americans.” Recognizing that older Americans “become more vulnerable to exhausting their savings, sometimes falling into poverty and living a life of hardship,” Democrats want to pay a higher benefit to retirees who have been in the system for at least 20 years.
The plan would be phased in at 1% per year for retirees aged 78 to 82. That would ultimately result in a 5% increase in benefits. The plan also proposes changing the way Social Security raises are calculated by using a consumer price indexing more closely related to how seniors spend their income.
The plan promotes an apparent contradiction. The plan’s stated purpose is to “put Social Security on a path to long-run solvency.” With the Social Security Trust Fund on a path to insolvency by 2035, how can a raise in benefits not accelerate the process?
Biden says he will do that “by asking Americans with especially high wages to pay the same taxes on those earnings that middle-class families pay.” The fund would access the extra money by raising the $137,700 yearly salary cap subject to payroll taxes.
But there is a point where the mathematics of reality meet the idealistic promises of the Biden plan. Taxing the rich more cannot save Social Security any more than it can pay for all the social welfare and government handouts already on the books.
In the first place, there’s not enough money to bail out a federal budget that is 55% spoken for before one dollar is collected. The primary source for income taxes is high earners, who, despite claims to the contrary, pay far more than their fair share.
Then there is the effect of taxation on the behavior of those who pay the most. Considering that virtually every type of investment income is exempted from payroll tax, raise taxes and the rich will move their income to investments, and contribute less to the Social Security fund.
Finally, there are demographic considerations that cannot be offset by making the rich pay more. U.S. birth rates and legal immigration are falling. Social Security relies on a birthrate of two children per woman of childbearing rage. Birth rates in the U.S. are at an all-time low and are part of the reason that the Social Security will start going in the red by 2035.
Even if Joe Biden wins, his proposed raise in benefits are far from a certainty. He needs a majority in Congress, and soon politicians are going to have to touch that “third rail” of politics and consider cuts to benefits to keep the system afloat.
Meanwhile, Americans who still have time need to take charge of their retirement. Social Security will only cover about 40% of most retirees’ living costs. Everyone needs a diversified plan.