Solvency Plan: Applying Payroll Taxes On Wages Above $400000
Those earning more than $400,000 a year might want to tune in. Under the Biden plan, youd have to pay a portion of the taxes that go toward funding Social Security.
Bidens main approach to boosting revenue would be expanding the 12.4 percent Old-Age, Survivors and Disability Insurance tax to cover earners who make more than $400,000 a year. Thats more simply known as a payroll tax, with employees paying 6.2 percent and employers fronting the other half.
The wage base tends to moderately increase every year and is currently capped at $137,700, though analysts are unsure of how much that rate might go up for 2021 due to the pandemic.
Bidens tax policy essentially means theres going to be a donut hole of workers who arent charged this new rate , though theoretically, that gap could close over a longer period of time.
Think of it simply as phasing in getting rid of the maximum, says Nancy Altman, president of Social Security Works who was appointed to serve a six-year term on the Social Security Advisory Board by House Speaker Nancy Pelosi. Its a long phase-in, and it will probably take about 30 years, but its not forever. She says those increases are indexed to coincide with rising wages, though the wage base cap might not lift off much next year given the pandemic.
Increase Payroll Taxes Across The Board
A surefire way to eliminate Social Security’s budgetary shortfall is to increase payroll taxes across the board for all working Americans. This would mean benefits stay consistent for current and future retirees, but it also means current workers would have to make do with less, which could impact their already poor savings habits.
How much would payroll taxes need to be raised? According to the Social Security Board of Trustees, the actuarial deficit in 2016 was 2.66%. It means the payroll tax would need to be increased by 2.66% to 15.06% from 12.4% to cover the long-term shortfall through 2090. Since most workers split this tax with their employer, it means they’d pay an extra 1.33% out of every paycheck. Since taxes aren’t too popular with the public, this surefire solution has received minimal support, at least at the proposed tax level. Smaller tax increases have received more public support.
How Might Annual Social Security Payroll Taxes Change
Social Security is mostly financed by a payroll tax of 12.4 percent on earnings below an annual threshold, split between employees and their employers. That threshold, $137,700 in 2020, increases over time with the growth in the national average wage.
The Larson proposal would finance the higher benefits it provides by increasing the Social Security payroll tax rate and raising the cap on earnings subject to payroll taxes. In 2050, the median annual payroll tax, split between employees and employers, would reach $8,600 in inflation-adjusted dollars, 18 percent more than under current law. Larsons gradual elimination of the payroll tax cap would increase payroll taxes much more for high-wage earners.
The Johnson proposal does not change payroll taxes.
What Should Be Done To Fix Social Security
The problemSocial Security trustees traditionally have reported on the status of the combined Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. The combined funds are projected to run out of money in 2033, less than 20 years away. Starting then, only about 75 percent of benefits will be paid if Congress does not enact financing reforms. Social Security policy in the United States is characterized by a high degree of inertia. The last major change occurred 32 years ago , and Congress made it at the last moment, with mere weeks to spare to avert a crisis.
The fixWhile a number of different options and combinations of options are available to restore solvency, I focus here on three options. The first proposal addresses congressional gridlock and is designed to maintain solvency over a 20-year period. The second and third proposals would be parts of a major reform package to restore solvency for a longer time period.
1) Deal with the gridlock in Congress. Taking a lesson from behavioral economics, Congress should pass a law involving default changes in Social Security that would automatically be enacted if it fails to act. The essential aspect of the proposal is that Congress makes a binding commitment to not let the date of Social Security insolvency be less than 15 years away. Delay is both costly and risky to Social Security participants, resulting in larger tax increases or benefit cuts than if Congress had made the changes earlier.
The Best Way To Fix Social Security
With the Social Security trust fund projected to be depleted within the next 15 years, policymakers have started to consider the changes needed to keep the trust fund solvent. While they often disagree about the details, there is broad support for making those changes in a progressive manner, placing larger net burdens on those retirees with more resources.
There are two possible strategies for improving Social Security finances while making the program more progressive. One strategy, embraced by some policymakers, is to raise taxes on high earners, which would raise enough revenue to keep Social Security solvent and also pay for benefit increases. Another strategy, for which some polls find popular support, is to reduce benefits for well off retirees. Either strategy, or a combination of the two, could achieve the goal of reducing the Social Security shortfall while protecting seniors with the greatest need. If policymakers pursue the benefit reduction strategy, however, they need to do it right.
As we have explained, however, reducing Social Security benefits based on annual incomes would create serious economic problems. Seniors would change their behavior to lower their reported income and avoid the benefit reductions. They might cut back their hours or retire sooner, or they might engage in financial manipulation, such as editing the timing of Social Security claims or withdrawals from retirement accounts.
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Raise The Income Limit
The ceiling was $137,700 for 2020, but the cap is adjusted for inflation each year and rose to $142,800 in 2021. According to a Congressional Research Service report updated Sept. 2, 2020 , eliminating the payroll cap while leaving in place current rules for capping benefit calculations would eliminate 73% of the projected 75-year shortfall.
Continue To Monitor Your Ssa Account At Least Annually
Just because you made corrections once to your Social Security record doesnât mean that additional errors wonât be made in the future. Monitoring your SSA account is an ongoing process, not a one-time thing. This is particularly true if you change your address, switch jobs or otherwise make changes to your life that can impact what appears in your SSA account.
Increasing Benefits For Survivors Or Widowed Spouses
Biden wants to change the way widows and widowers collect their benefits, increasing what they collect from a deceased workers check by about 20 percent per month.
About four million adults are receiving monthly Social Security benefits based on their deceased spouses earnings, according to the SSA. The system is currently only set up to provide widowed spouses with 100 percent of their deceased partners benefits if theyre both at full retirement age. In some cases, widows and widowers can see a 50 percent cut.
How Might Economic Hardship Change
The share of Social Security beneficiaries with incomes below the federal poverty level is slowly declining as productivity growth raises earnings and subsequent retirement incomes. But if federal policymakers allow the systems trust fund to run out, the poverty rate for beneficiaries will spike in about 15 years. By 2050, though, economic growth will reduce the poverty rate for Social Security beneficiaries below its current level.
Under the Larson proposal, the poverty rate for Social Security beneficiaries would fall even further.
Without reform, many Social Security beneficiaries will fall behind working Americans. The share with incomes below 25 percent of average earnings will double over the next 25 years if the Social Security trust fund runs out, and it will continue to rise afterwards. Even under the Larson proposal, which significantly expands Social Security, the share of beneficiaries experiencing hardship under this measure would grow over time.
The Social Security Fix
Everything the earnest but overburdened citizen needs to know about the Social Security financing shortfall and the leading proposals for addressing the problem. Cheerfully narrated and handsomely designed.
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Cover All Newly Hired State And Local Government Workers
About one-quarter of state and local government employees are not covered by Social Security. Rather, these workers are covered by retirement plans provided by state or local governments that have chosen not to participate in the Social Security program. Under one proposed change, Social Security would cover all newly hired state and local government workers. Those workers and their employers would each pay their share of Social Security payroll taxes, and the workers would receive Social Security benefits. Current state and local government workers would not be affected. This proposal would fill an estimated 6 percent of Social Securitys funding gap.
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Its Past Time For Congress To Fix Social Security
On August 31 the Trustees of Social Security and Medicare finally issued their 2021 annual report. The news wasnt good, but not as bad as many expected.
Normally the trustees issue their annual report sometime in the Spring. Last year it was issued April 22. This year the actuaries apparently spent more time massaging the data and adjusting their assumptions about the effects of the pandemic.
The bottom line wasnt much different from the 2020 report. The trustees and their actuaries estimate that the Social Security retirement trust fund will be unable to pay benefits after 2033. Thats one year earlier than estimated in the 2020 report.
After that, the annual tax revenue will fund about 76% of promised benefits. Farther into the future, after about 2045, the system will be able to pay only 70% of promised benefits.
Without action by Congress, presumably there will be a 24% across-the-board benefit cut beginning in 2034. But even thats not clear, because the law doesnt give the Social Security Administration any direction about how to reduce benefits or take other actions when theres a revenue shortfall.
The report also covers the Medicare Part A trust fund. That trust fund will run out of money after 2026. But tax revenue will be able to pay 91% of benefits after that.
Also, the Social Security actuaries were able to forecast only a modest decrease in the trust funds life by changing a number of their assumptions.
Progressively Link Longevity To Benefits
The bipartisan Save Our Social Security Act of 2016 presented perhaps the most sensible idea with regard to adjusting Social Security for greater life expectancies: index the full retirement age for longevity. In other words, the full retirement age would increase in step with life expectancies, as would the age at which delayed-retirement credits max out .
Why index benefits to life expectancy? One of the biggest issues for the program is that Americans’ life expectancies have risen far faster than Social Security’s full retirement age. That means retirees are drawing benefits for a much longer period of time. Indexing would presumably encourage seniors to wait longer to file for Social Security, and it would lower the average amount of time that seniors spend drawing benefits.
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Do Any Of These Social Security Solutions Speak To You
News flash, America: Social Security is in trouble.
According to the latest estimates in the Social Security Board of Trustees 2016 report, seniors’ most vital social program is just 17 years away from exhausting its $2.8 trillion in spare cash. If the trust funds run dry, the Trustees predict that an across-the-board benefits cut of up to 21% may be needed to sustain payouts through 2090. For the roughly 25 million retired workers who currently count on Social Security for at least half of their monthly income, this is a terrifying outlook.
If there’s good news, it’s that the program will remain solvent. Social Security benefits are primarily covered by payroll taxes, which means that as long as people keep working, Social Security will always be generating revenue. However, the way things are going, today’s payout rates won’t be sustainable beyond 2034.
Congress needs to act decisively, and soon, to fix Social Security — and our federal legislators have a number of potential solutions to choose from. However, partisan bickering has made it all but impossible for the two predominant parties to find a middle ground.
Here are 20 Social Security solutions that have been proposed. Some would partially or completely eliminate the estimated $11.4 trillion long-term budgetary shortfall. Others would actually cost the program more money by making benefits more generous. And still other ideas are nothing short of insane.
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What Is Social Security
The entire program managed by the Social Security Administration is known as Old-Age, Survivors, and Disability Insurance Program. Note there are two funds: one for retireesthe Old-Age and Survivors Insurance Trust Fundand one for those with disabilitiesthe Disability Insurance Trust Fund. The financial status of each is in a very different position, with different possible solutions to fix the financial problems.
Social Security was designed during the Great Depression as a safety net to be sure that we never again find seniors living under bridges, as was common then. It was designed as insurance, and Social Security payments are called benefits.
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On Capitol Hill, Democratic lawmakers have hinted at scaling back funding for Medicare expansion and drug pricing reform in the next phase of President Bidens infrastructure package. The social infrastructure portion of the $2 trillion-plus bill gives lawmakers a chance to slash pharmaceutical costs and expand the social safety net. With Democrats in control of the house, it could put pressure on President Biden to fulfill one of his promises, including lowering Medicares eligibility age to 60.
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I Hear A Number Of Questions And Concerns Around The Social Security Program From My Clients Some Wonder Whether The Program Will Be Intact By The Time They Get To Retirement
Many want to know how to optimize their benefits, and others how to better understand complex rules around spousal benefits in various scenarios. The media has a tendency to fill us with fear, and as a result there are more questions than answers regarding these topics. So much so that many Americans under the age of 50 are nervous about planning on receiving any benefits at all from Social Security. Id like to take a deep dive into those concerns.
What is Social Security?
Social Security is the common name for the Old Age, Survivors, and Disability Insurance program signed into law by President Franklin D. Roosevelt during the Great Depression. The program was originally designed to help replace income lost by individuals due to old age, the death of a spouse, or disability. The program is funded from payroll taxes collected from workers paychecks called FICA taxes. The government setup two trusts to hold the money: one for retirement and the other for disability. These trust funds pay roughly 63 million individuals over $1 trillion in benefits annually.
What is the current outlook?
Every year the Social Security and Medicare Boards of Trustees release a message to the public: . They estimate that the Old Age & Survivors Trust fund will be depleted by 2035. Once the trust fund is depleted, Social Security will not be able to pay out benefits above what they are receiving from payroll.
What are some of the proposals to fix the program?