A recent Social Security solvency proposal from the American Enterprise Institute is taking direct aim at affluent American retirees, namely the clients of many financial advisors.
The proposal—authored by Andrew Biggs, a senior fellow at the institute, and Kristin Shapiro, counsel at law firm Baker Hostetler—anticipates that the Social Security trust fund would become insolvent in 2033, creating an immediate need to sustain benefits for less affluent retirees heavily dependent on their monthly checks. The scheme would reallocate funds to lower-income senior Americans so that their benefits wouldn’t decline at that point in time.
The goal, according to Biggs and Shapiro, is to keep those seniors from falling into poverty in retirement. Some critics claim the proposal is a subtle attempt to transform Social Security into a welfare program for lower-income seniors.
The prevailing conventional wisdom is that the rules will impose broad cuts that don't discriminate by wealth or income, calling instead for all recipients to take “proportionate reductions” of 21% so that everyone would get only about 79% of their current Social Security checks after the system reaches insolvency. The authors question the accepted notion that proportionate cuts across the board would be either desirable or the only option available.
Biggs and Shapiro, citing previous research by Biggs, fear that such a haircut “would push millions of seniors into poverty and impair the lifestyles of even middle-class retirees.” They claim the Social Security Act “does not provide any guidance” on how benefit reductions should be implemented if the program runs out of funds.
Consequently, they argue the president could “direct Social Security’s limited resources to the most vulnerable seniors, while reducing benefits for high-income retirees or younger retirees, who may be able to delay retirement.” They acknowledge that the president does not have the ability to “unilaterally increase Social Security taxes,” nor would he be able to reduce “aggregate Social Security benefits by more than the amount needed to maintain the program’s solvency.”
However, Biggs and Shapiro argue there is “no legal basis for the view that the president would be required to reduce every beneficiary’s benefits by the same percentage,” though it would be one possible option available to him. The two authors maintain that, in the event of program insolvency, it would also be possible for the president to “choose to create reasonable criteria that would focus the necessary benefit reductions on the retirees who are most able to absorb them.”
It would be necessary for benefit reductions to be applied in a “reasonable and consistent” fashion and adjust them in a way that protects benefits for those who need them most, they say. One possible solution the authors submit would be for the president to cap benefits at approximately $2,050 (in 2024 dollars).
This, they claim, would make Social Security “solvent without any new tax increases or new debt.” Under this scenario, the lowest-income retirees and many middle-income retirees “would not have their benefits reduced even one cent.”
Furthermore, they note that the federal poverty threshold for single individuals is $1,170 per month, so this solution wouldn’t force any recipients below that line. Biggs and Shapiro estimate that approximately 80% of beneficiaries would get a “smaller reduction than they would under uniform percentage benefit cuts.”
What about those receiving the highest benefits? The authors estimate they would “receive a roughly 40% cut” relative to what they are scheduled to receive.
What are the political implications of the president acting unilaterally? Obviously, a lot of high-income people who worked, saved and waited until 70 to claim Social Security would feel shortchanged.
But Biggs and Shapiro contend that a president announcing the changes in advance could prevent a “cataclysmic” retirement income security event and possibly “reset” the terms of negotiations for real Social Security reform. It certainly would catch the attention of many well-off Americans, among others. Founded in 1938, the American Enterprise Institute rose to prominence in the 1980s as the home of supply-side economics.
In the beginning of their paper, the two note that Social Security’s looming shortfall has been on Washington’s radar for several decades, yet no serious action has been taken. In 2005, then-President George W. Bush proposed a partial privatization of Social Security though it didn't get traction. Five years later, then-President Barack Obama and House Speaker John Boehner held talks about reforming Social Security, but both leaders encountered opposition from within their parties.
As the moment of insolvency approaches, neither of the two most recent presidents—both of them older than 70—has opted to tackle the issue. President-elect Trump has said he’d refuse to either cut benefits or raise taxes, while President Biden has also refused to cut benefits or raise taxes on anyone earning under $400,000.
In Congress, there’s been much talk and a few serious concrete proposals. Most of the talk has centered on raising the payroll-tax income threshold, means-testing for high-income individuals or raising the ages for future recipients. If President-elect Trump remains in office until 2029 and is true to his word, little action is likely to be taken before 2029, when the day of reckoning is only four years away.
There is a widespread assumption that Congress and the president elected to office in 2028 will be able to negotiate a solution to the looming Social Security insolvency. But their record in recent decades offers little to enhance public confidence. Some think the Biggs-Shapiro solution would at least provide a short-term, stop-gap measure for those who relied heavily on their Social Security checks while legislators devised a new scheme.
But there are 70-year-olds who aren't wealthy by most definitions but who still delayed claiming Social Security and relied on their savings or even purchased an annuity as a bridge to get them from retirement in their mid-60s to the age of 70 when they would be eligible for the maximum benefit. These people might feel extremely betrayed by the Biggs-Shapiro solution.
One major critic of the two authors’ proposal is Alicia Munnell, director of the Center for Retirement Research at Boston College. “We do not want to be a year away from exhaustion causing enormous anxiety and insecurity among middle-class Americans,” she wrote at the MarketWatch website. The American Enterprise Institute paper, she said, is a “heavy-handed way to move Social Security away from social insurance for all to a welfare program for low earners.”
She voices skepticism that presidents would have the legal authority to administer a potential insolvency with the degree of latitude Biggs and Shapiro assume. The authors cite the case of Morton v. Ruiz, a 1974 case where the Supreme Court determined that the Bureau of Indian Affairs could manage a program “where Congress had mandated more benefits than funds allocated.”
At least one legal expert questioned whether the Morton v. Ruiz case was germane or even relevant to a Social Security crisis. Asked about the proposal, he said, "It's insane and Trump is not insane."
While calling the article “mischief,” she says Biggs and Shapiro ultimately go off the rails. Their solution, in her view, would only require Congress “to negotiate the much less pressing issue of finding funds to protect high earners.” She urges readers of their article to be “suspicious, very suspicious.”