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What Will President Biden Do to Social Security and Medicare?

Social Security's financial future is an urgent priority, but it'll still come after action on the economy and COVID, experts say.

The Biden Administration says it plans to multi-task. But there’s at least one task outlined in its pre-election plan that it won’t get to anytime soon, according to several experts.

And that’s reforming Social Security.

To be sure, it’s an urgent and important matter. The trustees estimated in its most recent report that, if policymakers take no further action, Social Security’s combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust fund reserves will be depleted in 2035.

And that means Social Security, after 2035, could pay about three-quarters of scheduled benefits using its tax income even if policymakers took no steps to shore up the program, according to this Center on Budget and Policy Priorities’ report, What the 2020 Trustees’ Report Shows About Social Security.

But even though the Social Security roof is about to leak, other roofs -- like COVID and the economy -- are leaking more.

“It’s becoming increasingly urgent,” said Richard Johnson, a senior fellow at the Urban Institute. “But I just think there are so many more pressing things on the agenda now,”

And Social Security is not among those things. Not now and not in the foreseeable future. “I don't see it bubbling up to the surface anytime soon,” said Johnson.

Others share that point of view. “Social Security may not be high on the list at the moment,” said Ron Gebhardtsbauer, the immediate past chair of the American Academy of Actuaries’ Social Security Committee.

And the prospects for it happening later are dim as well. “I think it may be a little difficult to do it over the next four years,” Gebhardtsbauer said.

What’s more, on the agenda or not, Gebhardtsbauer said, “Social Security is the third rail. And so it's usually hard to touch.”

By way of background, President Joe Biden’s proposed plan would remove the cap on the amount of earnings subject to the Social Security’s tax. Read Contribution and Benefit Base

It would impose the 12.4% Social Security OASDI tax on income above $400,000, according to a report published on JD Supra. Under current law, the Social Security OASDI tax, which is split equally between employers and employees, applies only with respect to income up to $142,800.

Extending the Social Security payroll tax to earnings above $400,000 would close about a quarter of the program’s long-term funding deficit and extend the life of the trust funds by about five years, according to an Urban Institute report co-authored by Johnson.

The Urban Institute's projections show that Biden’s proposals would lift more than one million people out of poverty in 2021 and cut the poverty rate for adult Social Security beneficiaries over the coming decades by more than half.

Biden’s plan would also boost median benefits 27% for beneficiaries in the bottom fifth of the lifetime earnings distribution compared with only 14% for beneficiaries in the top three-fifths of the lifetime earnings distribution. Watch Johnson discuss the report, An Analysis of Democratic presidential nominee Joe Biden’s Social Security Plans: Urban Institute.

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Of note, the increase in Social Security taxes on those earning more than $400,000 would not result in an increase in benefits, said Gebhardtsbauer.

Others, meanwhile, note the adverse effects if Biden’s proposal becomes a reality.

From the Jd Supra report:

  • Removal of the Social Security tax cap would be especially costly for self-employed, high-income individuals, who bear both the employee and employer portion of the tax. As a result of the elimination of the cap, individuals residing in high-tax states could be subject to a marginal tax rate exceeding 60%.
  • New York residents, and New York City residents in particular, could be hit especially hard. New York Governor Cuomo has proposed increasing the top New York State income tax rate to 10.86%, up from 8.82%. Elimination of the Social Security cap, combined with the proposed New York rate increase, could mean that some New York City residents will face a combined top marginal rate of almost 70%.

Johnson and others, however, don’t anticipate Congress working on Biden’s proposal given that “everything else has to be done first.” Nor does Johnson anticipate Congress working on two bills that were introduced last year. Rep. John Larson, D-Conn., introduced the Social Security 2100 Act, which would expand Social Security. And former Rep. Sam Johnson, R-Texas, introduced the Social Security Reform Act of 2016, which would shrink Social Security. Read Fixing Social Security and Comparing Democratic and Republican Approaches to Fixing Social Security.

What’s more, Johnson doesn’t expect Biden to push for a bipartisan commission to study and propose Social Security reforms as happened under President Barack Obama. Read The National Commission on Fiscal Responsibility and Reform.

“There are plenty of good policy reasons for change to take place,” said Johnson. “And your Congress can do multiple things at once and the administration will do multiple things at once. But they can't do everything at once.”

Johnson was hopeful, however, that Congress will take notice of the need for reform once Social Security starts paying out more in benefits than it takes in in revenue, starting this year. “It's going to add to the budget deficit for the first time,” he said. “And so that will certainly make Congress take notice.”

For his part, Gebhardtsbauer said addressing Social Security’s shortfall is required to help those planning for retirement, and waiting until the last moment would not be beneficial. “People need to plan for retirement,” he said.

So someone will have to be brave enough at some point to touch the third rail, to say there’s a problem that needs to be fixed.”I think everybody knows there's a problem,” said Gebhardtsbauer. “It's not impossible to fix. It just takes leadership, it takes guts to touch that third rail and figure out how to do it.”

Ultimately, there are just a few ways to fix Social Security: Cut benefits, raise taxes, or a combination of both.

Medicare in the Queue, too

As with Social Security, experts don’t anticipate Biden’s Medicare-related proposals becoming the law of the land in 2021, either. Biden has proposed lowering the Medicare eligibility age from 65 to 60 years old.

The speakers at a recent Employee Benefit Research Institute policy forum did not think it was likely that this was going anyplace, said Anna Rappaport, the chair of the Society of Actuaries’ Committee on Post-Retirement Needs and Risks.

Rappaport did, however, offer a list of healthcare issues that she thinks would be likely candidates to be addressed by Congress and Biden:

  • Healthcare will be a high priority, and most likely a priority early in the Biden administration.
  • Dealing with pandemic related issues and vaccination will be high on the priority list.
  • Expect a national coordinated policy to deal with pandemic related health issues and much more support of state and local public health departments as they attempt to deal with these issues.
  • Employer coverage will continue to be an important part of the U.S. healthcare system.
  • Filling in gaps will be important. There are gaps in public health systems, in who is covered by the system and in what is covered.
  • Underserved areas are an issue growing in importance. Over the past few years hospitals in underserved areas have closed, and some areas have few doctors. Specialists may be far away.
  • Healthcare spending is an important household issue, employer issue and national issue. The U.S. spends a higher percentage of GDP than any other country.
  • Food and housing insecurity will be linked to health issues and there may be attempts to coordinate the addressing of these areas.
  • There will be increasing focus on disparities.
  • There will be increasing focus on gun violence and opioids as public health issues.
  • There may be a re-examination of who is eligible for Medicaid, and also what is covered. This has the potential to be very disruptive to long-term care financing.
  • Technologies will create major opportunities to improve care and provide more care at home.
  • Telehealth and other technologies will likely have a strong influence on patterns of care. Payment systems will affect how much influence there is.
  • Policymakers will seek to minimize the number of uninsured.
  • There will be substantial disagreements about the role of the private sector and government in health care financing.