What Democrats Would Like To Do
We only have to look at President Biden’s 2020 campaign platform and bills put forward in the current congressional session to know what Democrats would like to do about Social Security. One key area where they’re on the same page is to raise the payroll tax cap.
In 2020, then-candidate Biden proposed applying payroll taxes used to fund Social Security to all income above $400,000. Currently, the maximum cap for payroll taxes is $147,000.
Other Democrats also like this general idea. For example, the Social Security 2100 Act authored by Rep. John Larson of Connecticut includes the same proposal. The Social Security Expansion Act sponsored by Sen. Elizabeth Warren of Massachusetts, Rep. Peter DeFazio of Oregon, and Sen. Bernie Sanders, the Vermont independent, would increase the payroll tax threshold to $250,000.
Currently, all workers pay 6.2% and their employers pay another 6.2% to fund Social Security. The Social Security Expansion Act would increase the tax rate to 12.4% on investment and business income made by millionaires and billionaires.
Democrats also want to increase Social Security benefits in various ways. One especially popular proposal is to change how cost-of-living adjustments are calculated by switching to an inflation metric focused on the costs of seniors. Other plans feature increases to the minimum benefits for Social Security recipients.
Revenue Increases And Trust Fund Impacts
Social Security faces a long-run financing shortfall. Over the programs 75-year forecast horizon, dedicated revenues will fall short of spending by an estimated 3.42 percent of taxable payroll, or 1.19 percent of gross domestic product. The reserves of the combined Social Security retirement and disability trust funds are projected to be depleted in 2035. At that point, Social Security could pay only about 80 percent of scheduled benefits using its annual tax income.
Social Security 2100 contains one provision that would increase Social Security revenues. The bill would apply the Social Security payroll tax of 12.4 percent, split equally between employees and employers, to earnings and self-employment income above $400,000. Currently, the tax applies only to earnings up to a specified level, which is $147,000 in 2022. The $400,000 threshold would remain fixed, while the current-law taxable maximum would continue to rise with wage growth, so that by around 2050 all earnings would be subject to the Social Security payroll tax. Newly taxed earnings would count toward benefits at a 1 percent replacement rate.
In contrast, the earlier Larson bill would have gradually raised the payroll tax rate, in addition to taxing earnings above $400,000. The combined tax rate for employees and employers would have been increased by 0.1 percentage point each year for 24 years, eventually reaching 14.8 percent.
Elimination Of The Disability Earnings Cliff
Another disability provision is the elimination of the disability earnings cliff. The way this disability earnings cliff currently works is that when individuals receiving disability benefits go over a certain earnings amount for a certain period of time, they go into whats called an extended period of eligibility. During this 36 month period, if monthly earnings are over the substantial gainful activity threshold, even by one dollar, benefits are withheld for that month.
Once that 36 month period is over, if earnings go over the threshold, even by one dollar, the disability benefit is completely terminated.
The new law would remove the cliff and would simply reduce the disability payment by $1 dollar for every $2 over the limit in much the same way early Social Security benefits are reduced with the earnings limit.
One interesting note here is that the substantial gainful activity level they would be using would be the level for blind individuals which is substantially higher than the normal threshold.
This provision would sunset at the end of 2026.
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The Most Likely Social Security Changes
So what are the most likely Social Security changes on the way after the November elections? There probably won’t be any changes to the program — at least not in the next Congress.
When one political party doesn’t hold the White House as well as majorities in both chambers of Congress, major reforms usually don’t happen. Fixing Social Security will require some compromises. With a divided government probably on the way and a presidential election in 2024, neither Democrats nor Republicans are likely to have a spirit of compromise.
To be sure, significant changes will be needed to Social Security within the next 13 years or less to keep the program from going insolvent. But it will almost certainly require some degree of cooperation between the two major political parties to push those changes through. For now, the status quo for Social Security appears to be the most probable scenario for the next couple of years.
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The Bill Would Increase Benefits And Eligibility While Raising Taxes On The Wealthy
The House Ways and Means Committee held a hearing to consider a new bill to reform the way Social Security works and address the retirement crisis.
The House of Representatives held a hearing on Dec. 7 to consider a bill aimed at protecting future Social Security benefits.
“Social Security 2100: A Sacred Trust” is a plan to improve and increase benefits, protect against inflation and strengthen the Social Security Trust Fund. It was authored by House Ways and Means Social Security Subcommittee Chairman John B. Larson, D-Conn., who introduced the bill to Congress in October.
“For too long, Congress has forsaken its duty to enhance benefits. With 10,000 Baby Boomers a day becoming eligible, and with Millennials needing Social Security more than any generation, the time for Congress to act is now.”
– Statement from Rep. John B. Larson
The Social Security Administration estimates that without further action by Congress, the trust fund that pays retirement benefits will be depleted by 2033. By then, continuing tax income will cover just 76% of Social Security benefits for eligible retirees.
Social Security 2100 is essentially a “first step” toward enhancing the program, Larson said at the hearing, aiming to extend the depletion of Social Securitys funds to 2038.
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Caregiver Credits Increased Minimum Benefits And A Switch In Inflation Adjustments Are On The List
Social Security 2100 Act would alter aspects of the program.
Social Security may be getting a facelift soon, thanks in part to Congressman John Larsons proposal called Social Security 2100 Act: A Sacred Trust.
The proposal, which incorporates previous suggestions for improvements to the program as well as some of the promises President Biden made during his campaign, would alter numerous aspects of Social Security, including adding caregiver credits for people who have to leave the workforce to care for their children or elderly family members and an increased minimum benefit.
Rep. Larson, who is also the chairman of the House Ways and Means Social Security Subcommittee, reintroduced the proposal on Tuesday, years after first working on it. He was joined by colleagues in Congress to highlight the large number of Americans who rely on the program for their wellbeing and the importance of improving Social Security, not just for current retirees and the generations after. Millennials will need it more than baby boomers, Larson said during the press conference.
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Larson said a hearing for the bill is scheduled in November and the goal is to place it on President Bidens desk. Nobody understands better than the president of the United States that Social Security is a sacred trust between the people and its government, Larson said.
Increase the minimum benefit
Switch to CPI-E
An across-the-board benefit bump
What’s Included In The Social Security 2100 Act Update
The Social Security 2100 Act aims to protect Social Security payments against inflation by increasing the tax rate on the top 0.4% of wage earners. It would:
- Increase benefits for all beneficiaries by an average of 2% “to make up for inadequate Cost-of-Living Adjustments .”
- Improve the COLA formula to “better reflect the costs incurred by seniors” such as health care and other necessities.
- Repeal the Windfall Elimination Provision , which reduces Social Security benefits for many public servants.
- Increase the minimum benefit to 25% above the poverty line to protect low-income workers.
- Extend the solvency of Social Security by applying the current payroll tax to wages above $400,000.
The bill also includes provisions to improve benefits for widows, extend dependent benefits and provide caregiver credits. Additionally, it would end the 5-month waiting period to receive disability benefits.
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Change To The Annual Cost Of Living Calculation
Currently the cost of living adjustment is calculated with the CPI-W. This methodology has been criticized for not taking into account that a retirees expenses are not the same as a working person. The Bureau of Labor Statistics has kept up with an experimental inflation number for the past several years called the CPI-E. In this measurement they use the expenses of households over the age of 62. When you look at a side by side comparison, its easy to see where a retirees expenses are different.
This is one of the provisions that will sunset at the end of 2026.
Interesting notethe CPI-E wouldnt always lead to a higher cost of living adjustment.
Increase Of The Taxable Wage Base
A permanent change in the Social Security 2100 Act is an increase in the taxable wage base. In 2021, you only pay Social Security taxes on the first $142,800 of earnings, and anyone earning over that wont have to pay the 12.4% FICA tax.
However, the new law would put a gap in how this is taxed. If an individuals income exceeded $400,000 the FICA tax would kick back in.
Those excess wages, as this bill calls it, would not be applied to your benefit calculation at the same rate as what they currently are. Instead, a new bracket would be added to credit your benefit by 1% of the excess.
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What You Need To Know
- The bill would apply the payroll tax to earnings over $400,000 and change the way COLAs are calculated.
- A policy group criticized the bill for raising less revenue and increasing benefits more than the 2019 version of the bill.
- The COVID pandemic and inflation have given a new urgency to act on the bill, Larson said.
The House Ways and Means Social Security Subcommittee plans to debate his Social Security 2100: A Sacred Trust bill soon, Rep. John Larson, D-Conn., chairman of the House Ways and Means Social Security Subcommittee, told ThinkAdvisor in a recent email.
The legislation adopts the consumer price index for the elderly as the basis of the annual cost-of-living adjustment and applies the payroll tax to annual wages above $400,000.
We are in the process of working toward markup, which will be held hopefully very soon, Larson said in the email.
A new report by the Committee for a Responsible Federal Budget criticizes the bill for only keeping Social Security solvent until 2038 only four years from its current projected depletion date.
The bill is a substantial downgrade from 2019s Social Security 2100 Act , which weve praised as a responsible solution to Social Securitys financial troubles, according to the policy group.
The previous version of Social Security 2100 would have subjected earnings over $400,000 to the payroll tax while also gradually raising the payroll tax rate from 12.4% to 14.8%, the report states.
The Latest
House Leadership Delays Social Security Expansion While Crafting Tax Breaks For Rich Retirees
Nancy Pelosis office is blocking Social Security expansion, while Congress prepares to pass a windfall for rich retirees, insurance companies, and large asset managers like Vanguard and Fidelity.
Michael Brochstein/Sipa USA via AP Images
Even President Biden has called to expand Social Security, leaving House Speaker Nancy Pelosi as the key Democratic holdout.
As Democrats barreled toward a surprisingly productive legislative session in July, House leadership quietly killed a vote on whether to expand Social Security.
Social Security 2100, the first expansion to the New Deal program in 50 years, would increase all checks by about 2 percent of the average benefit, offset through a payroll tax on wages above $400,000. The bill, long championed by Rep. John Larson and introduced with nearly 200 co-sponsors, was set for a markup by the Ways and Means Committee in late July, before House Speaker Nancy Pelosis office axed it.
In an interview, Larson said that the bill faced opposition from Wendell Primus, Pelosis lead staffer on a variety of domestic policy issues. Pelosi was focused on passing the Inflation Reduction Act, he added, and cited concerns over the bill from Democrat frontliners, the representatives most vulnerable to a challenge in November elections. Nancy Pelosi said, Just keep working the bill, Larson said. And thats what weve continued to do.
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Increase To Benefits After 15 Years Eligibility
Individuals that have been receiving Social Security benefits for 15 years will receive a 1% increase to their primary insurance amount and will continue to the 20th year, which will result in a 5% increase. In addition, any spousal or childrens benefits paid from someone receiving these increases would also increase.
Note: The text of the proposal uses the terms eligibility and receiving benefits interchangeably. Technically, eligibility for a retirement benefit is defined as 62 years of age. For purposes of this article, well assume that the writers of this bill mean for benefits to increase after 15 years of receiving benefits.
Column: It’s Time For Us Congress To Debate Social Security Reform In The Light Of Day
May 5 – Social Security has never failed to make its benefit payments since the mailing of monthly checks began in 1940, but most Americans these days are worried about the future of the program.
Who can blame them? Social Securitys two trust funds are projected to run dry in 2034, and the program would be able to pay only 80% of its obligations to retirees and disabled workers at that point. Politicians dont exactly generate confidence when they make irresponsible – and wrong – comments claiming that Social Security is going bankrupt or running out of money.
The result is public skepticism and concern. Forty-two percent of working Americans tell Pew Research Center pollsters that they doubt they will receive any benefits from Social Security. An equal share thinks they will receive a benefit, but at a reduced level. .
The Social Security trustees have been projecting this shortfall since the early 1990s, but the U.S. Congress has failed to act. What we need is a full, public debate on reform legislation – and an actual vote by lawmakers. The window is open for that to happen this year – the Democratic Party has developed an internal consensus on legislation that addresses the solvency problem, and also expands benefits modestly. It controls both legislative chambers – at least for now.
People have got to know where you stand, said U.S. Representative John Larson, a Connecticut Democrat and chief sponsor of the legislation.
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Is The Social Security 2100 Act A Looming Disaster For Retirement Planning
The five-year life expectancy on most of the changes in the Social Security 2100 act could lead to significant challenges to planning for retirement. These sunsetting provisions are a fairly common bargaining chip to gather votes when there isnt enough support for a full change. This is what happened with the Trump tax cuts and lots of other legislation over the years.
But this really sets the scene for a disaster because not only does it make it INCREDIBLY hard to plan your retirement, because it would be hard to know what to expect when the provisions were scheduled to sunset, but many of these provisions would also require the Social Security Administration to recalculate benefits for payments starting in 2027. Since the calculation process is already challenging for the SSA, having an across-the-board recalculation for nearly everyone who is receiving benefits could lead to massive benefit errors and over/under payment notices.
Hopefully, any law that is passed will include changes that are permanent.
Social Securitys Hard Truth
The Social Security Trustees 2022 report projects that Social Securitys retirement program, known as Old Age and Survivors Insurance , will be insolvent in 2034, resulting in 23 percent across-the-board benefit cuts.REF That means that no one who is currently 55 or younger will receive a single full retirement benefit before the program runs out of money, and about 60 million people who are already retired and collecting benefits in 2034 will be subject to cuts averaging $4,400 per year.
Despite the common myth that workers payroll taxes have been set aside to fund their future retirement benefits, Social Security has been operating in the red for 12 years, paying out more in benefits than it collects in taxes. It can do this because when previous Social Security taxes exceeded the benefits paid, the government spent what the American publicthought was being set aside for Social Security on other programs and credited Social Securitys trust fund with IOUs. Cashing in on those IOUs, as is happening now, requires the Treasury to issue more publicly held debt.
Despite the myth that workers payroll taxes have been set aside to fund their retirement, Social Security has been operating in the red for 12 years, paying out more in benefits than it collects in taxes.
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