Social Security payroll taxes could significantly increase if legislation supported by House Democrats becomes law. The nation’s highest wage earners would bear the first and heaviest burden under the proposed plan, which Democrats say is necessary to prevent shortfalls in Social Security funding and pay for needed benefit increases.
Under the Social Security 2100 Act, earnings up to $400,000 would be subject to Social Security taxes. Currently, earnings in excess of $132,900 are exempt from that levy. The bill would also gradually raise the Social Security tax on all workers to 14.8% from the current 12.4%. That increase would happen over the next 23 years. Employees and employers would continue to split the tax 50-50.
Such increases are necessary to forestall possible cuts in Social Security benefits, according to the bill’s supporters, which include 200 House Democrats. A recent report from the Social Security Trustees warned that a 21% reduction in benefits could be necessary by 2031 to keep the program afloat. Social Security’s funding woes have several causes, including an aging population and a shrinking tax-base caused by wage growth among high-earners (over that $132,900 cap) and wage stagnation among middle- and lower-income workers.
The Social Security Administration’s number crunchers say the increased level of funding outlined in the legislation would add 75 years of solvency to the program.
The Social Security 2100 Act also addresses concerns that benefits have not kept up with the increased costs faced by retirees. The bill would mandate a new minimum benefit set at 125 percent of the poverty line, and all Social Security recipients would get an average increase of about 2 percent in their benefits.
Additionally, the yearly cost-of-living adjustment, or COLA, would use a revamped formula to set annual increases designed to better offset rising expenses for older Americans.
While everyone agrees that Social Security is in desperate need, it’s difficult to get consensus on anything in today’s polarized Washington DC. It’s hard to imagine Republicans supporting this legislation because the bill calls for increased taxes. The GOP, which controls the Senate and White House, has traditionally favored cutting benefits to solidify Social Security’s future. Conservative economists worry that raising Social Security benefits and taxes might prompt lower retirement savings rates among middle-and-lower-income Americans and increased tax evasion among elite earners.
Will Social Security be around when I retire, is among the most frequent questions I hear from clients and callers to my Money Matters radio show. Here’s my answer: If you are in your 50’s, yes, Social Security will be there in your retirement, perhaps with reduced benefits. If you are just starting your career, the answer is less clear. While I doubt the Social Security 2100 Act will become law, its introduction gives me renewed hope that our lawmakers will seriously address the problems facing Social Security and, by extension, the older Americans who rely on the program to ensure their ability to retire with dignity.
