One way to fix Social Security? "Smash the cap"
Social Security is heading for a funding cliff, with its trust fund reserves potentially becoming insolvent by 2033 — an outcome that would mean beneficiaries would face a 25% shave on their monthly checks. But there is a way to fix most of the funding shortfall, policy experts say: "Smash the cap."
That refers to the Social Security tax cap, a feature of the program since it was launched in the 1930s following the Great Depression. Essentially, any income over the earnings cap isn't subject to the Social Security payroll tax, which is 6.2% for workers and an additional 6.2% for employers.
In 2023, the tax cap stands at $160,200, which means any income above that amount is exempt from the payroll tax. As a result, middle- and lower-income workers bear a much greater tax burden in funding Social Security than the 6% of Americans who earn above the threshold, according a new analysis from the left-leaning Center for Economic and Policy Research.
"If you make over that cap, like 6% of the population does, you could be paying 1% of your income or even less than that," noted Sarah Rawlins, program associate at CEPR.
Yet a middle-income worker earning less than the $160,200 cap in 2023 will pay an effective tax rate that is six times higher than the millionaire's tax burden, she noted.
That's why the Congressional Budget Office (CBO), a federal agency that provides financial analyses of policy issues, calls the Social Security tax cap "regressive" — middle- and low-income workers pay a much greater share of their income toward the program than the rich.
Eliminating or lifting the tax cap could help stabilize Social Security's trust fund by providing more revenue to the program, Rawlins said. A December analysis by the CBO found that eliminating the cap for earnings over $250,000 would keep the trust fund solvent through 2046.
Meanwhile, some lawmakers are proposing changes that include both getting rid of the tax cap and other changes to address Social Security's funding challenges. Senator Bernie Sanders, an Independent from Vermont, and Senator Elizabeth Warren, a Democrat from Massachusetts, in February introduced legislation that would stabilize the trust fund for the next 75 years.
Among their plans: Lift the tax cap for people earning $250,000, and add the Social Security tax to investment and business income, which is currently exempt from the tax.
Raise the retirement age?
Others oppose raising taxes on higher-income Americans as the answer to fixing Social Security. Last year, the Republican Study Committee, a group of House conservatives, proposed lifting the retirement age for claiming Social Security to age 70, up from today's full retirement age of 66 to 67 years old.
While House Speaker Kevin McCarthy has said Social Security won't be on the chopping block during the ongoing debt ceiling debate, pushing the retirement age higher isn't a new approach. For instance, the full retirement age was 65 until 1983, when changes to the program took into account the fact that Americans were living longer and the retirement age was raised to 66 or 67 (depending on one's birth year).
Americans' longer lifespans are part of the argument that Republican lawmakers make in favor of lifting the Social Security retirement age: the "miracle" of longer life expectancy means that workers can wait to get their benefits, according to Republican Study Committee's documents.
Regardless of whether people can actually work until they are 70, raising the retirement age is effectively a benefits cut because today's workers would lose out on between three and four years of benefits. Based on the average Social Security benefit for retirees, raising the retirement age to 70 would equate to a loss of at least $65,000 in payments for the typical beneficiary.
Still, with a divided Congress, for now it's unlikely that either the Democrats or Republicans could push through their changes to stabilize Social Security.