Social Security is cracking under the weight of an aging population. The program ran its second consecutive annual deficit last year, and the trust funds that pay benefits could be depleted by 2033. Should that happen, continuing revenue from payroll taxes would cover only 80% of scheduled payments. That means retired workers and other recipients would potentially see automatic benefit cuts of 20% or more.
Fortunately, politicians in Washington have already proposed a broad spectrum of possible solutions. One of those solutions is the Social Security Expansion Act. Here's what retired workers should know.
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The Social Security Expansion Act could keep the trust funds solvent
Senator Bernie Sanders (I-Vt.) reintroduced the Social Security Expansion Act earlier this year. The bill outlines nine changes that would collectively keep the trust fund solvent over the next 75 years, according to the Office of the Chief Actuary. The bill also promises to expand benefits for current and future recipients by $2,400 per year.
Here are three of the most noteworthy changes outlined by the Social Security Expansion Act.
Apply payroll tax to more income: Wages are taxed at 12.4% by the Social Security program, but some income is exempt under current law. The maximum taxable earnings limit in 2023 is $160,200, but it rises each year to keep pace with changes in general wage levels. Any income above the limit is not subject to Social Security payroll tax.
The Social Security Expansion Act would apply the payroll tax to all income over $250,000. That would temporarily create a donut hole between $160,200 and $250,000, but the gap would close over time as the maximum taxable earnings limit continued to rise. Eventually, all income would be subject to Social Security payroll tax.
Increase the tax rate on net investment income for high earners: Under current law, taxpayers with a modified adjusted gross income (MAGI) above certain thresholds -- $200,000 for single filers and $250,000 for joint filers -- are subject to a 3.8% tax on net investment income. Sources of net investment income include interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.
The Social Security Expansion Act would apply a separate 12.4% tax to net investment income for taxpayers with a MAGI above those thresholds, bringing the total tax rate to 16.2%. Readers should be clear on one point: The tax hike would be applied in addition to any other taxes due under current law, such as capital gains taxes and dividend taxes.
Increase Social Security cost-of-living adjustments (COLAs): Social Security benefits get an annual cost-of-living adjustment (COLA) to protect buying power from inflation. Under current law, COLAs are determined based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But some experts see that as a problem. The CPI-W tracks spending patterns among workers, but they tend to spend money differently than retired workers on Social Security.
The Social Security Expansion Act would solve that problem by substituting the Consumer Price Index for the Elderly (CPI-E), which tracks the spending patterns of individuals aged 65 and older. Many experts believe the CPI-E is a better measure of inflation among Social Security recipients.
Readers should be aware that this provision would actually put more pressure on the Social Security trust fund because it would likely lead to bigger COLAs. Specifically, the CPI-E tends to measure inflation two-tenths of a percentage point higher than the CPI-W, meaning COLAs calculated using the CPI-E would be about two-tenths of a percentage point bigger.
The Social Security Expansion Act is unlikely to win approval Congress
Republicans and Democrats rarely see eye to eye where the federal budget is concerned, but Social Security is especially tricky given the stakes. Benefits are an important source of income for millions of older Americans, but the program accounts for roughly one-fifth of federal spending. That means Social Security is simultaneously an indispensable safety net for seniors and a serious burden on taxpayers.
That last point is particularly salient, because the Social Security Expansion Act leans on sizable tax hikes to overcome a long-term (75-year) funding shortfall of $22.4 trillion. Republicans will likely take issue with those tax hikes, meaning the bill is unlikely to win approval in the Republican-controlled House in its current form.
