Just a few years ago, Democratic politicians were debating whether to accept cuts to Social Security benefits. No more: The only Social Security reform debate within the party is about how much benefits should be expanded — and how to pay for it.
The shift is a smart political move, considering that large majorities of Americans support maintaining or expanding Social Security benefits, even if it means paying more taxes. More importantly, it is smart policy at a time when many workers are unable to save for retirement and traditional pensions are waning.
Just how far has the Democratic Party moved on this issue? Consider the recent history. In 2010, a bipartisan commission appointed by President Barack Obama recommended cutting benefits through higher retirement ages and a less generous annual cost-of-living adjustment (COLA). And the following year, Obama agreed to a less generous COLA as part of a “grand bargain” with Republicans to curb federal spending.
None of that ever became law, but the proposals did spark a counteroffensive by progressives, launched in 2013, that has been gaining momentum ever since. Progressives aim to shore up Social Security solvency not through benefit cuts but by implementing new taxes — and they want to respond to rising retirement insecurity by expanding benefits.
Among the five top-polling candidates for the Democratic presidential nomination, four support expansion of some type: Joe Biden, Elizabeth Warren, Bernie Sanders and Kamala Harris. One candidate, Pete Buttigieg, opposes any cuts to benefits.
Meanwhile, reform legislation is now advancing in the U.S. House of Representatives. The only real differences among the various plans are over how much to expand benefits and how to fund the reforms.
The first task of any reform bill will be to restore the long-range solvency of Social Security. The program’s actuaries project that the combined retirement and disability trust funds will be depleted in 2035, with payroll taxes coming in at that time sufficient to pay only 80% of promised benefits.
The bill advancing in the House — sponsored by Rep. John Larson, D-Conn., — would restore the program’s financial solvency for the next 75 years. Addressing solvency not only avoids those devastating benefit cuts, but would go a long way to address the worries expressed by Americans over the financial health of Social Security. According to Gallup, 67% of Americans worry about Social Security.
Larson also proposes a modest across-the-board benefit increase equal to about 2% of the average benefit (about $30 per month), and shifting to a more generous annual cost-of-living adjustment formula more sensitive to medical inflation and other costs disproportionately affecting older adults. The bill would also increase the special minimum benefit paid to low-income retirees.
The Social Security 2100 Act would use two funding mechanisms to pay for the changes. First, it would increase payroll tax rates by 0.1 percentage point annually through 2043, reaching 14.8% for that year and later, split between workers and employers. Workers now pay 6.2% of earnings, and employers pay a matching amount, up to $132,900, where the tax is capped. Larson also would increase taxes on the wealthy, by resuming payroll tax collections on earnings over $400,000.
Progressive back bigger increases
Meanwhile, candidates Sanders and Warren both have proposals that not only deal with solvency but include more substantial benefit hikes than the House bill.
Expansion makes good political sense. Among current workers, 42% worry that they will not receive any Social Security benefit in the future, and 74% support reforms that do not reduce benefits, according to the Pew Research Center.
And the policy argument is straightforward. Just 51% of workers say they expect workplace retirement savings will be a major source of income in retirement, according to a survey by the Employee Benefit Research Institute (EBRI). Likewise, just 41% of retirees tell EBRI that they rely on a defined benefit pension as a major source of income — a figure that is expected to fall further in the years ahead.
Meanwhile, Social Security benefits not only are modest — they are inadequate for anyone relying on the program as a primary source of retirement security. “The goal of the program is to ensure basic economic security, but right now benefits are too low,” said Nancy Altman, who heads up Social Security Works, one of the key advocacy groups that has pushed for expansion.
Most financial planners say retirees should aim to replace 70% to 80% of their working income when they retire. Yet a worker with career-averaged earnings of $50,000 who claims benefits this year at full retirement age would receive just over $20,000, or 40% of pre-retirement benefits.
Sanders would boost benefits across the board; for low-income workers, this would translate to a bit more than $100 per month. The bill also would adopt the more generous CPI-E index of inflation as the measure of annual COLAs. It would improve the special minimum benefit for low-income workers by increasing and indexing it to be equal to 125% of the poverty line.
Warren jolted the presidential race a bit when she announced her plan last month. She proposes a larger benefit expansion — $200 a month across the board. Like Sanders, she would adopt the CPI-E, and she also calls for a new credit in the benefit formula for family caregivers. This provision would be especially beneficial for women, who tend to bear caregiving responsibilities disproportionately. Caregiving is a key reason that women tend to work fewer years than men, and it depresses their career earnings. In turn, that reduces their income from Social Security, pensions and savings.
Sanders and Warren also take a more progressive tack than does Larson in funding their plans. Both forgo any broad increase in payroll tax rates, instead proposing to increase taxes only for wealthy households.
Warren would impose a 14.8% Social Security contribution requirement on individual wages above $250,000, split between employees and employers. She also would create a new 14.8% tax on investment income for individuals earning more than that amount.
Sanders would apply the current payroll tax rate to wages over $250,000 and apply a 6.2% tax on investment income.
Campaign trail pressure from Warren and Sanders could help get the Larson bill to a vote on the floor of the House this fall. That would have the positive effect of getting Republican House members on the record, argues Altman.
“Until recently, Republicans have been able to get by saying they want to save Social Security, and that they want to see a bipartisan solution,” she said. “A vote on the 2100 Act will mean that they can’t keep hiding on the issue.”