The Congressional Budget Office (CBO) reports that spending on people aged 65 and older[1] has increased as a share of federal spending from 35 percent (2005) to 40 percent (2018) and is projected to rise to 50 percent (2029).  The federal budget deficit is projected to exceed $1 trillion a year from 2022 to 2029.  Proposals recently offered by Democrats intending to run for President in 2020 or to shape the party’s policy for that race may have an effect on this situation.  None of the proposals claim to aim at deficit reduction.  Instead, they target reducing income inequality and/or financing expanded programs.

First, it is proposed to reform Social Security.[2]  As originally designed, Social Security enhanced private preparation for retirement by adding the resources from a tax on currently working people to individual savings and/or pensions.  Today, however, there appears to be a savings crisis among working people.

There is also a financing crisis for Social Security.  The actuaries at the Social Security Administration report that outlays (payments) will soon exceed income (withholding tax revenues).  Thereafter the payments will be paid from an accumulated surplus held in the form of U.S. treasury bonds.  When that trust fund is exhausted by 2034, benefits will have to be reduced.  Currently, about 63 million people receive Social Security benefits.  The number is expected to rise to 89 million by 2030.  The total current cost is about $1 trillion.  The maximum amount of income subject to Social Security tax is $132,900; the current withholding tax on payrolls is 12.4 percent.

Democrats propose to increase the minimum benefit to help lower-income people who have saved less than have higher income people; increase benefits by an average of about two percent; raise the annual cost-of-living adjustment to payments to respond to the reality that retirees consume goods and services in a different pattern than do still-working people; cut the tax on benefits for middle-income recipients while increasing them on upper-income recipients; and increase the payroll tax rate from the current to 14.8 percent by 2040, and the payroll tax would be imposed on incomes above $400,000 a year, while incomes between $132,900 a year and $400,000 a year would not be subject to taxation.

This proposal would permanently fix the financing problem.  It would also increase benefits paid out to some Social Security recipients.  An estimated three-quarters of the extra income would go to covering the looming deficit; the rest would go to increased benefits for lower-income recipients.

[1] Social Security, Medicare, Medicaid.

[2] Robert Pear, “Democrats Push First Major Social Security Expansion Since 1972,” NYT, 4 February 2019.