Congress Has Routinely Needed To Raise The Debt Limit To Avoid A Default
When necessary, Congress has always acted to raise the debt limit if it does not, the nation would go into defaultwith disastrous consequences. Congress has done so 78 times since 1960: 49 times under Republican presidents and 29 times under Democratic presidents. It voted to suspend the debt limiteffectively raising itthree times under President Donald Trump and increased the debt limit twice under President Joe Biden in late 2021.
If the federal government defaults, people and businesses will not receive the money and services on which they depend. A default also puts at risk all federal programs, including Social Security, Medicare and Medicaid, defense spending, veterans benefits, public health, federal law enforcement, and federal interest payments, to name just a few. As a result, millions of American households would be unable to meet basic needs, and countless businesses would soon fail. The fallout would spread rapidly across the entire economy.
A default would send shock waves through global financial markets and would likely cause credit markets worldwide to freeze up and stock markets to plunge.Council of Economic Advisers
What Is Social Security
- The Disability Insurance Trust Fund for individuals with disabilities
These two funds are legally separate and their financial prospects differ significantly.
Social Security was launched during the Great Depression as a safety net for older adults. The program was designed to function as insurance, which is why Social Security payments are called benefits.
Social Security Reform: Options To Raise Revenues
Social Security is the primary source of government-funded retirement support in the United States. Since its establishment in 1935, Social Security has grown to become the largest program in the federal budget outlays in 2022 will represent more than one-fifth of total federal spending. However, the Social Security Trustees project that with the retirement of baby boomers and lengthening of life expectancies, the Old-Age and Survivors Insurance trust fund will spend more every year in payments to beneficiaries than it collects in revenues. As a result, the trust fund will be depleted by 2034. At that time, an estimated 70 million recipients would see a 23 percent reduction in their benefits.
Many options exist to shore up the solvency of OASI, including increasing revenues dedicated to the program, raising the full retirement age, and . A balanced approach that included components from each option in combination would likely provide the fairest, most lasting, and least painful adjustment for the future. Here we examine proposed modifications to Social Security that would increase income assigned to the program.
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Former Rep Johnsons Proposal
This proposal addresses the trust fund deficit without raising taxes by increasing the age at which full benefits are paid and reducing benefits for future medium to high-paid beneficiaries. The principal provisions that address the deficit are the increase in the age at which full benefits are paid, the reduction in benefits for the upper 55% of workers, and a change in the way the annual cost-of-living increases are calculated. The proposal also increases benefits for low-income beneficiaries. There are no provisions to increase payroll taxes, the taxable wage base, or other sources of income.
The red line in Figure 3 shows individual equity measurements for the Johnson proposal. Some items to note from the above graph are as follows:
More Help For Children Of Deceased Workers
Some people may not be aware that Social Security provides benefits to children of disabled or deceased workers if they are full-time students.
The legislation would raise the eligibility age for students to collect benefits to 22, provided the individual is a full-time student in college or a vocational school. Currently, the program ends for children of disabled or deceased workers when they turn 19 years old or before that age if they are no longer a full-time student.
The lawmakers say extending this benefit would help ensure that the children of deceased or disabled parents can continue their education beyond high school.
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The Social Security Reform Act Of 2023
We have this rare moment to accomplish seismic achievements, and this is the time to do it, says Rep. Richard Neal , the chair of the House Ways and Means Committee.
Yesterday, Neal was among a handful of Democrats who trotted out the newest model of their Social Security reform legislation.
Its not too different from the model they introduced in 2019. However this time, it features some changes aimed at attracting more support from Republicans, per a CNBC article.
And it just might fly this time although for reasons well get to later, we dont expect passage until 2023.
Like the 2019 proposal, the current version has two striking features
- First, theres no increase in full retirement age. It stays at 67 for anyone born after 1959
- Second, the annual cost-of-living adjustments would be tied to a measure of inflation called CPI-E which would have the effect of raising the annual COLA at a faster clip than it rises now.
Of course, leaving the retirement age alone and raising the COLA has to be paid for somehow. After all, the Social Security trust fund is forecast to be depleted by 2033 at which point only current payroll taxes would fund the program and benefits would have to be instantly slashed by 22%.
But unlike in the 2019 proposal, an increase in the payroll tax rate is off the table.
Two years ago, the plan was to gradually raise the rate over the next quarter-century from 12.4% to 14.8%.
Gop Members Of Congress Threaten Debt Limit Default To Cut Social Security And Medicare
Several minority leaders in Congress indicate that holding the debt limit hostage to force program cuts in Social Security and Medicare is part of their 2023 playbook.
At some point next year, Congress will need to raise the nations debt limit to prevent the United States from defaulting on its financial obligations. However, key House Republican leaders have recently indicated that they plan to take advantage of the need to increase the federal governments borrowing cap to force spending cuts to Social Security and Medicare, putting these two critical programs at risk.
What is the debt limit?
Current law constrains the ability of the U.S. Department of the Treasury to issue debt to meet the governments ongoing cash needs through a statutory ceiling called the debt limit. The Treasury cannot borrow more money than is allowed under the limit. As a result, once the debt ceiling is reached, the Treasury will not have enough revenue to meet all the obligations required under previous legislation unless Congress passes new legislation raising or suspending the debt limit. Through accounting moves known as extraordinary measures, the Treasury can buy more time after reaching the debt limit, but those measures typically last for a few months before the government runs out of cashthe so-called X Date.
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Policy Option : Increase The Social Security Payroll Tax Rate
One option to help shore up Social Securitys long-term solvency would be to increase the payroll tax rate, similar to legislation enacted as a product of the 1983 Greenspan Commissions recommendations on Social Security reform. According to an analysis from the Committee for a Responsible Federal Budget , increasing the payroll tax by 1 percentage point could raise $1 trillion in new revenues for Social Security over a 10-year period and shrink the programs 75-year shortfall gap by 28 percent. Another analysis from the Congressional Budget Office estimates that the same 1 percentage point increase would have a more modest revenue effect, raising $712 billion over 10 years.
Proponents of increasing the payroll tax rate believe that it would be a relatively simple revision to administer because it would not involve major changes to the tax system. They also contend that an increase of just 0.5 or 1.0 percent to an employees overall payroll tax obligation is not likely to result in significant additional financial strain for a majority of Americans. Proponents also highlight that the increased tax obligation would be borne equally by employers and employees, unlike traditional tax increases which are borne entirely by employees.
Reduce Newly Eligible Retirement Benefits For High Earners
Another option is to reduce benefits for high earners rather than all earners, improving the equity of payouts. One proposal, B7.7, included in the Summary of Provisions that Would Change the Social Security Program aims to reduce individual Social Security benefits if modified adjusted gross income is above $60,000 for single filers or $120,000 for taxpayers filing jointly. MAGI is a taxpayers adjusted gross income, minus taxable Social Security benefits plus nontaxable interest income. The percentage reduction would increase linearly up to 50 percent for single filers with MAGI of $180,000 and above or joint filers with MAGI of $360,000 and above. Thresholds would be indexed to the SSA average wage index and the proposal would take effect for newly-eligible beneficiaries 2027 and after. This approach is expected to improve the long-range actuarial balance by 15 percent.
Effects Of The Gift To The First Generation
It has been argued that the first generation of social security participants have, in effect, received a large gift, because they received far more benefits than they paid into the system. The term associated with this historical imbalance has been coined “legacy debt”.Robert J. Shiller noted that “the initial designers of the Social Security System in 1935 had envisioned the building of a large trust fund”, but “the 1939 amendments and subsequent changes prevented this from happening”.
As such, the gift to the first generation is necessarily borne by subsequent generations. In this pay-as-you-go system, current workers are paying the benefits of the previous generation, instead of investing for their own retirement, and therefore, attempts at privatizing Social Security could result in workers having to pay twice: once to fund the benefits of current retirees, and a second time to fund their own retirement.
Would Those Changes Fix The Program’s Funding Shortfall
Expanding the payroll tax would boost the Social Security Administration’s trust fund, ensuring its solvency through 2096, according to DeFazio.
Whether this bill moves forward or not, boosting payroll taxes in some fashion is viewed as a way to guarantee that current and future retirees don’t lose benefits after 2035.
For instance, the Congressional Research Service said in a 2021 report that “raising or eliminating the cap on wages that are subject to taxes could reduce the long-range deficit in the Social Security trust funds.”
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Reduce Cost Of Living Adjustments
The current system sets the initial benefit level based on the retiree’s past wages. The benefit level is based on the 35 highest years of earnings. This initial amount is then subject to an annual Cost of Living Adjustment or COLA. Recent COLA were 2.3% in 2007, 5.8% in 2008, and zero for 2009â2011.
The COLA is computed based on the “Consumer Price Index for Urban Wage Earners and Clerical Workers” or CPI-W. According to the CBO: “Many analysts believe that the CPI-W overstates increases in the cost of living because it does not fully account for the fact that consumers generally adjust their spending patterns as some prices change relative to others”. However, CBO also reported that: “CPI-E, an experimental version of the CPI that reflects the purchasing patterns of older people, has been 0.3 percentage points higher than the CPI-W over the past three decades”. CBO estimates that reducing the COLA by 0.5% annually from its current computed amount would reduce the 75-year actuarial shortfall by 0.3% of GDP or about 50%. Reducing each year’s COLA results in an annual compounding effect, with greater effect on those receiving benefits the longest.
Would A Tax Increase Pay For All This
The bill would increase the Social Security payroll tax on higher-income workers. Currently, workers pay the Social Security tax on their first $147,000 of earnings. To be sure, most Americans earn less than that. But higher-income workers who make more than $147,000 annually don’t pay the Social Security tax on any earnings above that level.
Under the bill, the payroll tax would kick in again for people earning above $250,000. Only the top 7% of earners would see their taxes go up as a result, according to DeFazio.
However, there’s one quirk about this arrangement: It would create a “donut hole” in which earnings between $147,000 and $250,000 would not be subject to the payroll tax, Shedden noted.
The bill would also extend the Social Security payroll tax to investment and business income, an issue that could face resistance. “I’m leery about that,” she said. “Social Security was set up to be based on contributions on earned income, and this mixes up the basket of earned and unearned income.”
Social Security Finances: Present And Future
Social Security is mostly a pay-as-you-go programthat is, current benefits are financed largely by current payroll taxes. Of the $1.1 trillion in annual program costs in 2020 , almost 90% was covered by payroll taxes, approximately 3% was covered by taxation of the Social Security benefits transferred from the general government account to the program, and over 7% was covered by interest earned on the bonds held in the combined retirement and disability trust funds paid by the federal government.
Yet according to the Social Security trustees, the trust funds began to shrink in 2021and by 2034, they will be exhausted. At that point, payroll taxes and taxes on benefits will only be able to pay 78% of program costs. The projected shortfall over the next 75 years is 3.54% of payroll, up from a 2.66% deficit in 2016. The cost of the program is also projected to increase, from the current 5% of GDP to more than 6% by 2080, while non-interest income remains essentially flat, at about 4.5% of GDP.
Although long and covering three or so generations, the 75-year horizon is arbitrary, and it cuts off additional years of deficit as well as future generations. The trustees, therefore, also calculate the shortfall over an infinite time horizon. On that basis, the deficit is now at 4.6% of payrollup from 4% in 2016.
Effect Of Unemployment On Program Funding
Increasing unemployment due to the subprime mortgage crisis of 2008â2010 has significantly reduced the amount of payroll tax income that funds Social Security. Further, the crisis also caused more to apply for both retirement and disability benefits than expected. During 2009, payroll taxes and taxation of benefits resulted in cash revenues of $689.2 billion, while payments totaled $685.8 billion, resulting in a cash surplus of $3.4 billion. Interest of $118.3 billion meant that the Social Security Trust Fund overall increased by $121.7 billion . The 2009 cash surplus of $3.4 billion was a significant reduction from the $63.9 billion cash surplus of 2008.
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Proposal From Rep Larson And Sens Blumenthal And Van Hollen
The blue line in Figure 6 shows social adequacy measurements for the Larson proposal. Some items to note are as follows:
- All beneficiaries would have adequate benefits with respect to all three adequacy benchmarks under this proposal.
- The minimum benefit under this proposal would be equal to 125% of the poverty guidelines for 2019, indexed in future years to NAW. It exceeds the proposed formula benefit for beneficiaries at or below the 20th percentile. It also grows to more than 150% of the poverty guidelines in 2042, because the rate of increase in the minimum benefit is more than the assumed rate of increase in the poverty guidelines .
- Above the 30th percentile, the slope of the blue line is almost parallel with current law. This outcome is because the Larson formula is very similar to the current law formula and the increases in payroll tax under the proposal allow full benefits to be paid with no 24% reduction in benefits.
Changes Must Come To Social Security
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Changes will be made in Social Security. The questions are: What will they be? When will they be made?
If nothing is changed, the Social Security retirement trust fund will run out of money. The 2020 report from the trustees of Social Security estimated that would occur in 2034. But that estimate was based on data through the end of 2019, before the pandemic recession reduced payroll tax revenue and caused many people to begin collecting retirement benefits earlier than they had planned.
The trustees wont issue an updated report for a few more months, but it likely will estimate the trust fund will run out of money before 2034. Other sources have estimated the trust fund will be exhausted between 2030 and 2032.
Social Security wont end when the trust fund runs out of money. The program receives payroll taxes each year, and those are estimated to be enough to pay 75% to 80% of promised benefits indefinitely.
But if Congress doesnt act, when the trust fund is empty there will be an automatic across-the-board 20% to 25% reduction in all benefits.
During the 2020 campaign, Joe Biden proposed changes to Social Security similar to those in Congressman John Larsons Social Security 2100 Act.
But those taxes at best would allow the trust fund to remain solvent for only a few more years, depending on the economic assumptions used.
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