Personal Finance

Here's what a Biden presidential win may mean for your Social Security benefits

Key Points
  • Democratic presidential nominee Joe Biden's plan for Social Security includes increased benefits for low earners and more taxes for high-income individuals.
  • The plan could have lasting implications for how much people at both sides of the income spectrum can spend over their lives, according to estimates from one economist.
  • Here's how much someone's living standard could change, based on their income, if the plan is adopted.
Democratic presidential candidate former Vice President Joe Biden reacts while giving a speech during a campaign event at Tougaloo College on March 08, 2020 in Tougaloo, Mississippi.
Jonathan Bachman | Getty Images

The 2020 presidential election could be a make it or break it moment for Social Security.

The reason: Social Security's funding, already on the verge of running out, could reach that threshold sooner, thanks to the economic damage brought on by Covid-19.

While some benefits will still be payable when that happens, talks on Capitol Hill have increasingly turned to how to restore the program's solvency.

That means the next president could have the opportunity to help shape the program's future in the next four years.

Democratic presidential nominee Joe Biden has emerged with a plan of his own. Broadly, it would boost benefits for low-income households while raising taxes on high earners.

How Biden wants to change Social Security

zimmytws | iStock | Getty Images

Biden would increase the special minimum benefit, which was created to provide low-earners with adequate benefits. Biden calls for setting that figure at 125% of the federal poverty line. That would bring it to $1,301 from $886 a month as of 2019, according to an analysis by the Penn Wharton Budget Model at the University of Pennsylvania.

Biden's plan also calls for making survivor benefits more generous by increasing them about 20% more per month. Today, surviving spouses can see up to a 50% cut to their monthly checks when their partner passes away.

We definitely need to have higher taxes. It seems fair to ask the rich to pay more, but it is a good size hit
Larry Kotlikoff
founder, Economic Security Planning

It also includes more generous checks for beneficiaries who live a long time. Increases totaling 5% of an individual's primary insurance amount, or the benefit they receive at full retirement age, would be phased in at 1% per year from years 16 to 20 of claiming.

To pay for it, Biden's plan also calls for applying payroll taxes on wages of $400,000 and above. Currently, workers and employers each pay 6.2% toward Social Security, but that is capped at wages of $137,700 as of 2020. (Employers and employees also each pay 1.45% toward Medicare.)

How the changes could affect lifetime spending

Thomas Barwick

The benefit increases and higher taxes will have consequences when it comes to how much people are able to spend in their lifetimes, according to Larry Kotlikoff, a professor of economics at Boston University and founder of Economic Security Planning, a provider of financial planning tools. 

Benefit increases for those who live long lives would benefit low income earners the most, based on scenarios run on his company's MaxiFi Planner tool, which calculates how much more one can "spend" based on a variety of inputs such as retirement date, earnings history and more.

The reason for that is the 5% benefit increase is based on the average wage, and those at the bottom earned less than that rate.

How lifetime discretionary income could change under Biden's Social Security plan

Income Current discretionary spending New discretionary spending - taxed Increase ($) Increase (%) New discretionary spending � Untaxed Increase ($) Increase (%)
50% Average Wage Index* ($26,073)$521,727 $549,570 $27,843 5.34%$549,570 $27,843 5.34%
100% AWI ($52,146)$951,964 $979,828 $27,864 2.93%$979,828 $27,864 2.93%
200% AWI ($104,292)$1,365,497 $1,388,609 $23,112 1.69%1,394,079$28,582 2.09%
300% AWI ($156,438)$1,517,388 $1,540,235 $22,847 1.51%$1,546,208 $28,820 1.90%

Source: MaxiFi Planner. *Average Wage Index data from 2018, according to the Social Security Administration.

"For somebody who is a low earner, like earning half the average, it's like a 10% benefit increase," Kotlikoff said.

Someone earning half of a benchmark known as the Average Wage Index would get the biggest boost in their ability to spend, according to Kotlikoff's calculations. Those people would be earning about $26,073 per year, based on the latest numbers from the Social Security Administration. With the benefit increase, their ability to spend would go up by 5.34%. 

"Their living standard gets to go up every year by 5.34%. They could spend 5.34% more every year," Kotlikoff said. "Economics doesn't say wait until you're 78 to start spending the money … You can spend more now."

Those who earn exactly the full average wage in the index, or $52,146 per year, would get a 2.93% increase in their ability to spend. That would be further reduced for those with incomes above that level, who unlike lower earners, would have their Social Security benefits taxed.

How payroll taxes on wages over $400,000 could impact lifetime discretionary spending

Income (per year) Current discretionary spending (lifetime) New discretionary spending (lifetime) Decrease (lifetime)
$500,000.00 $7,400,192.00 $7,181,199.00 $218,993.00