Senator Bernie Sanders (I-VT) introduced a bill in the U.S. Senate in June that would extend the solvency of Social Security through 2096 and increase benefits by $2,400 per year for beneficiaries.

The Social Security Expansion Act, sponsored by Sanders and Senator Elizabeth Warren (D-MA), would lift the income tax cap and apply the Social Security payroll tax to all income above $250,000. Currently, the payroll tax applies to just the first $147,000 of a person's earnings. Sanders says 93% of households would not see a tax increase if this bill is passed. 

"It is absurd that a billionaire in America today pays the same amount of Social Security taxes as someone making $147,000 a year," Sanders said. "It's time to scrap the cap, expand benefits, and fully fund Social Security. I am proud that the Social Security Administration has estimated that our legislation to expand Social Security benefits by $2,400 a year will fully fund Social Security for the next 75 years by applying the payroll tax on all income -- including capital gains -- above $250,000 a year."

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A 20% benefit cut is on the horizon

The subject of extending the solvency of Social Security took on greater urgency after the Social Security Board of Trustees issued its 2022 report in June, stating that the asset reserves of the Old-Age and Survivors Insurance (OASI) trust fund, which pays benefits to retirees, is projected to be depleted in 2035. While shocking, that is not unexpected as it is one year later than projected last year. However, perhaps even more shocking is that seniors would see a 20% pay cut in 2035, as the report said that the asset reserves would only be enough to pay 80% of benefits by then.

The asset reserves represent the difference between the income and cost of the program. It is being depleted because of a combination of a revenue shortfall and rising costs. The report said asset reserves of the combined OASI and Disability Insurance (DI) trust funds fell by $56 billion in 2021 as costs were higher than income. The total annual cost of the program is projected to exceed income in 2022 as well and remain higher throughout the 75-year projection period. This would lead to reduced benefits, with a projected 74% paid out by 2096 -- unless the math changes somehow.

That's what Sanders and Representative Peter Defazio (D-OR), who introduced the House version of the bill, are trying to do with this legislation. Their proposal would ensure 100% benefits throughout the 75-year projection period until 2096. It would do this, as mentioned, by applying the payroll tax to all those making over $250,000. This would also apply not just to salary but to investments and business income too. 

Making sense of it

At present, 12.4% is taken out of each paycheck for people earning up to $147,000, with half paid by the employer and half paid by the worker. So, if you make $147,000 or less, you are paying 6.2% into Social Security. As Sanders explained at a June 9 Senate hearing, if you make, say, $1.47 million, you only pay 0.6% of your income to Social Security. "That may make sense to somebody," Sanders said at the hearing. "It doesn't make sense to me."

If this bill is approved, the same rate would be taxed on individuals making $250,000 or more. Those making $147,000 or less would continue to pay the same rate as well, with a donut hole between the $147,000 and $250,000 -- although that $147,000 typically goes up each year, as it is based on average income.

The increased funding -- along with a change in the cost-of-living-adjustments (COLA) to the Consumer Price Index for the Elderly (CPI-E) -- would help to increase benefits by an estimated $200 per month, or $2,400 per year, which bears out, according to an analysis by the Social Security Administration (SSA).

Now comes the hard part: getting the bill, or some kind of compromise version, approved in Congress. It should be an issue that is front and center leading up to the midterm elections this November.