The Social Security 2100 Act: What you need to know
Last Tuesday, Connecticut lawmakers Rep. John Larson and Sen. Richard Blumenthal reintroduced bills in the U.S. House of Representatives and Senate aimed at making the Social Security program more sustainable financially. In what has become a familiar refrain among lawmakers, the bills sought to raise revenue in a couple of different ways. One element of the bill aims to modify the current wage cap on Social Security taxes, allowing the current $118,500 limit to stand but reimposing Social Security taxes on earnings above the $400,000 level. That figure is consistent with one popular definition of high-income individuals, with the same $400,000 amount marking the bottom of the top 39.6% tax bracket for single filers.
In addition, the measure would slowly raise Social Security payroll tax rates from 6.2% to 7.2% over the next 25 years. Employers would see a similar increase in the portion of Social Security taxes they pay.
Opposition to any tax increases among lawmakers would ordinarily make a proposal like this dead on arrival. But a couple of concessions could make the bill more of a starting point for a negotiation. As written, the bill includes some valuable breaks for current and future recipients. First, the bill changes the benefit formula for calculating Social Security payments, resulting in a small increase in benefits right away and linking future increases to what many see as a more favorable measure of cost increases for seniors.
More importantly, the measure would make it so that fewer retirees would have to pay income taxes on their benefits. Currently, income tax on benefits kicks in as low as $25,000 in income for singles and $32,000 for joint filers. The bill would lift those amounts to $50,000 and $100,000 respectively, with the sponsors arguing that 11 million retired Americans would get a tax break from the proposal.
The great debate
As much as the Social Security 2100 bill aims to incorporate planks from both political parties' platforms, the fundamental difficulty in achieving Social Security Reform is that lawmakers have different basic beliefs about the function of Social Security. Many lawmakers believe that the program has expanded far beyond its original purpose, as rising life expectancies have allowed more people to take advantage of Social Security benefits and to receive them for longer time periods after retirement. Problems with abuse of the Social Security disability program have also led some to believe that the best solution to its financial woes is to rein in its scope.
On the other side of the spectrum, some lawmakers point to rising levels of income and wealth inequality in the U.S. as cause to increase the scope of Social Security, looking for ways to expand benefits despite its financial challenges. Some proposals have aimed at eliminating the wage cap entirely, as well as means-testing benefits for high-net-worth individuals who arguably have no need for benefits. Others have aimed at ensuring minimum sustenance-level benefits even for those whose wage histories wouldn't ordinarily warrant those levels of payouts.
Unfortunately, past attempts to reach across party lines for bipartisan reform proposals have met with opposition, often from camps on both sides of the political spectrum. The Simpson-Bowles budget recommendations included a number of Social Security reform efforts, including using lower cost-of-living adjustments, cutting benefits for high-income retirees, and boosting the wage base to cover about 90% of all wages -- corresponding to levels of roughly $180,000 to $200,000 currently. It also involved raising the retirement age to 68 by around 2050 and 69 by 2070 to 2075. Yet those provisions raised objections from just about everyone, with typical arguments embracing half of its proposals while rejecting the other half.
The net impact on you is that trying to plan for Social Security by the time you retire can be difficult if not impossible. Your best choice is to do everything you can to provide for your own retirement independent of what Social Security might provide, and treat any benefits you eventually receive as an unanticipated bonus. In all likelihood, Social Security will continue along similar lines to how it looks today, no matter how long the debate in Washington lasts and how heated the arguments become.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.