Social Security is approaching a fiscal cliff, with its trust fund reserves possibly being bankrupt by 2033 – a scenario that would result in a 25% reduction in monthly payments for recipients. Yet there is a solution to address most of the financing deficit, say policy experts.
The Social Security tax cap, a characteristic of the program since its inception in the 1930s in response to the Great Depression. Payroll tax for Social Security, which is 6.2% for employees and an additional 6.2% for employers, does not apply to any earnings above the earnings ceiling.
In 2024, the tax maximum will be $160,200, meaning any income over this threshold will be free from social security tax. Hence, according to a recent Center for Economic and Policy Research report, middle- and low-income employees are burdened with a far greater share of Social Security taxes than those earning above the threshold.
Sarah Rawlins, the program associate at CEPR, stated that if your income exceeds the threshold, as it does for 6% of the population, you may pay 1% of your salary or even less. She stated that a middle-income worker earning less than $160,200 in 2024 would pay an effective tax rate six times greater than that of a billionaire.
This is why the Congressional Budget Office (CBO), a government organization that conducts financial evaluations of policy problems, refers to the Social Security tax cap as “regressive” – middle- and low-income employees contribute a more significant proportion of their income to the program than do wealthy individuals.
According to Rawlins, removing or raising the tax ceiling might assist in maintaining the Social Security trust fund by giving the program extra money. The CBO determined in December that removing the ceiling on earnings beyond $250,000 would keep the trust fund sustainable through 2046.
Meanwhile, some politicians have proposed eliminating the tax ceiling and other adjustments to solve Social Security’s budget issues. In February, Vermont Independent Senator Bernie Sanders and Massachusetts Democrat Senator Elizabeth Warren submitted legislation to ensure 75 years of stability for the trust fund.
Among their proposals is removing the $250,000 tax cap and adding the Social Security tax to investment and business income, which are currently exempt.
Increase the retirement age?
Others reject boosting taxes on Those with higher incomes as the solution to Social Security’s problems. The Republican Study Committee, a group of House conservatives, advocated increasing the full retirement age for Social Security to 70 years old, from 66 to 67.
While House Speaker Kevin McCarthy has stated that Social Security would not be cut during the present debt limit fight, increasing the retirement age is not a novel idea. For example, the full retirement age was 65 until 1983, when it was increased to 66 or 67 (depending on the individual’s birth year) to account for Americans’ living longer.
According to Republican Study Committee materials, the “miracle” of greater life expectancy allows employees to delay receiving benefits.
Whether or not individuals can work until age 70, extending the retirement age would reduce benefits since current workers would lose between three and four years of benefits. Raising the retirement age to 70 would result in a loss of at least $65,000 in payments to the average beneficiary, based on the average Social Security payout for retirees.
With a split House, it is now improbable that either the Democrats or the Republicans could pass any legislation to fix Social Security.
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