“Keep your eye on the donut, not on the hole,” so the saying goes. But in assessing President Joe Biden’s plan to fix Social Security’s longtime shortfall, it’s smart to keep your eye on the “donut hole.” Biden has proposed creating such a gap by not taxing earnings of between $142,800 — the current maximum subject to Social Security tax — and $400,000.
But Richard Johnson, director of the Urban Institute’s Program on Retirement Policy, argues that he has a better idea — one that would generate more tax revenue for Social Security benefits without creating a donut hole, he tells ThinkAdvisor in an interview.
“Increase the $142,800 tax max to something like $250,000 today and continue to raise it [based on] average earnings growth,” he recommends.
Part of Johnson’s reasoning is rooted in the presumption that if Social Security were to be perceived as only for low-income earners, political support for the crucial program would be diminished.
(Max Richtman, president and CEO, National Committee to Preserve Social Security and Medicare, told ThinkAdvisor that the Biden plan would raise the payroll tax cap over time, making the donut hole temporary.)
Johnson is an economist and senior fellow in the Institute’s Income and Benefits Policy Center. The nonprofit organization conducts a wide range of research to improve public policy.
Among numerous studies, Johnson wrote the December 2020 report “Comparing Democratic and Republican Approaches to Fixing Social Security.” He speaks frequently on income and health security for older Americans.
In the interview, he discusses the severe impact the coronavirus pandemic has had on pre-retirees who have lost their jobs. Some are taking Social Security early and reducing their benefits for the long term; others are raiding their 401(k) accounts for money to live on.
Johnson argues that the sooner policymakers address the Social Security dilemma, the lower potential tax hikes and benefit cuts would be. He favors reducing benefits slightly for higher-income earners.
This year, the Social Security Administration will pay out more in benefits than it receives in revenues, Johnson says. The Old-Age and Survivors Insurance Trust Fund is projected to run dry as early as 2031.
Former President Donald Trump presented no plan to solve the Social Security problem. In fact, the last time Social Security’s financing woes were acted upon was in 1983, an emergency situation when the program was a month away from the inability to pay full benefits, Johnson says.
ThinkAdvisor recently interviewed Johnson, who was speaking from Washington, D.C., where the Urban Institute is based. Beyond Social Security, he discussed research he has conducted on retirement prospects for millennials (“Men are earning less; women are earning more”) and an investigation into what he calls “the enormous differences” in retirement income between Black and white Americans.
For example, “we’re trying to understand how much of the retirement wealth gap is due to discrimination that people face in the workplace. Part of it is not having access to the best jobs,” he maintains.
Here are highlight from our interview:
THINKADVISOR: What are the chief challenges to President Biden’s plan to solve the Social Security predicament?
RICHARD JOHNSON: The problem is that Biden’s plan would increase Social Security taxes on higher-income people — those earning above $400,000 [a year]. Now people pay the Social Security payroll tax on earnings up to $142,800. Under Biden’s plan, you and your employer would pay your Social Security tax up to that point and then, in addition, you would pay taxes on earnings that exceed $400,000. But you wouldn’t get any benefits on those taxes.
What are the implications?
Because the higher-income people would get less for their taxes paid than lower-earnings people, it makes the plan a lot less attractive to higher-income people. You worry about the political support for Social Security. It’s extremely popular in that everyone feels they have a stake in the system. But if it’s seen only as a lower-income program, that support can erode.
To what extent would Biden’s plan enhance benefits?
It would increase the cost-of-living adjustments by tying them to changes in the Consumer Price Index for the Elderly, which tends to increase at a more rapid rate than the standard CPI. The CPI-E weights things like medical expenses more heavily. It wouldn’t be a huge increase, but over time it would accumulate; so it’s of significance to older people. Also, Biden’s plan would create an earnings credit for caregivers of young children and older people.
What do you think of the president’s plan?
Extending the payroll tax to higher earnings make sense. One reason is that when we last addressed Social Security’s financing problems back in 1983, the payroll tax rate covered 90% of earnings; and today it covers only 83%. That’s because there’s been so much growth in the top end of the earnings distribution.
How would you improve upon Biden’s plan?
Instead of the donut hole that he [proposes] — which is, you pay up to a certain amount, then “take a holiday”; and if you’re lucky enough to make lots of money, you pay additional taxes — I would simply increase the $142,800 tax max to something like $250,000 today and continue to raise it [based on] average earnings growth. And I would probably reduce benefits a bit for higher-income people.
What are your thoughts on the idea of again increasing Social Security’s full retirement age?
Other plans have proposed that. The challenge is that a lot of people with health problems can’t work beyond 62 or 65. So if you increase full retirement age, you have to think hard about strengthening the safety net for those who can’t work beyond those ages.
What would the higher taxes Biden proposes be used for, specifically?
To help finance the Social Security system by closing the funding gap, and much of it would be used to increase benefits. One way would be to create a meaningful minimum benefit. Right now, that’s so meager it doesn’t affect many people. It’s really meaningless. A lot of workers who earn low wages all their lives end up in retirement with a benefit that doesn’t pull them out of poverty.
How would Biden’s plan remedy that?
It would have a minimum benefit equal to 125% of the federal poverty level, which in 2020 was equivalent to about $16,000 a year. But that part of his plan would apply only to those who have spent 30 years in covered employment. A lot of people have only intermittent work histories over their lifetime. That’s one reason they end up with low Social Security benefits.
What’s perhaps the biggest challenge that Biden’s plan faces?
There are a lot of other areas in society that need more funding too, such as infrastructure, the coronavirus pandemic, climate change, college graduates’ student-loan problems. There are many issues. So how much of the available tax revenues might there be to put into Social Security?