Ginning up fears that Social Security “is going broke” or “is running out of money” is a mainstay of American politics — and an argument that experts point out simply isn’t true.
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While the current Social Security trust fund may come up short sometime in 2034 according to recent projections, the reality is that the program is simply too important and too popular with the majority of Americans that it ever would be allowed to run dry, notes Shai Akabas, director of economic policy at the Bipartisan Policy Center.
“Social Security has been around for well over 80 years now and it has more support than just about any other government function,” Akabas told CNBC. “It is highly unlikely that it is going to disappear anytime soon.”
What Social Security does need is a plan to make up a projected deficit that, at worst, would cut benefit checks by about 20% sometime in the future. That plan could be the one recently unveiled by Sens. Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.), along with Reps. Jan Schakowsky (D-Ill.) and Val Hoyle (D-Ore.) in the U.S. House of Representatives.
What the Bill Proposes
The proposed measure – dubbed the “Social Security Expansion Act” – would expand benefits by an average of $2,400 a year per person and completely finance Social Security for the next 75 years. The bill calls for a new tax on some investment income and the elimination of the cap on wages taxed to support the Social Security trust fund.
Under existing law, the payroll tax rate is 12.4%, half paid by workers and half paid by employers, with self-employed workers paying the entire amount. In 2023, all earned income above $160,200 is exempt from Social Security tax, while investment income isn’t taxed at all.
Right now, a couple earning $75,000 a year pays Social Security tax at the 6.2% rate, while someone earning $325,000 is taxed on slightly less than half of what he earns at an effective rate of 3.02% – a much lower rate than the one paid by couple that makes less.
The wage cap – which automatically adjusts each year based on increases in the national average wage index – rose from $147,000 in 2022 and $128,400 in 2018, an increase of close to 25% in five years.
Under the proposed Social Security Expansion Act, investment income would be taxed at the self-employed payroll rate of 12.4% starting at $200,000 for individuals and $250,000 for joint tax filers. In addition, income of $250,000 or more would be subject to the payroll tax. Income in the gap between the current wage cap and $250,000 wouldn’t be taxed. Instead, the proposed rules would wait until the wage cap rises to $250,000, at which point the cap becomes moot.
Potential Impact
Sanders released a table showing the effect of the tax on the 10 highest-earning CEOs in the U.S. With compensation of $23.5 billion in 2022, Tesla CEO Elon Musk paid a Social Security tax rate of 0.00004% on his earnings. Under the Social Security Expansion Act, Musk would pay an additional $2.9 billion into Social Security, leaving him with a still-impressive $21.5 billion paycheck.
“The legislation that we are introducing today will expand Social Security benefits by $2,400 a year and will extend the solvency of Social Security for the next 75 years by making sure that the wealthiest people in our society pay their fair share into the system,” Sanders said in a statement.
“Right now, a Wall Street CEO who makes $30 million pays the same amount into Social Security as someone who makes $160,000 a year. Our bill puts an end to that absurdity which will allow us to protect Social Security for generations to come while lifting millions of seniors out of poverty.”
The bill, which was initially introduced in June 2022, was recently reintroduced in February to the newly seated Congress.
Bottom Line
The Social Security trust funds are projected to run dry by 2035, potentially resulting in a 20% reduction in benefits. However, Democratic-proposed legislation calls for major changes that would boost benefits by an average of $2,400 per person per year and extend the life of the safety net by another 75 years. Sponsored by Sen. Bernie Sanders and Democrats on Capitol Hill, the Social Security Expansion Act would lift the payroll tax wage cap and institute a new tax on investment income to fully fund Social Security.
Tips for Claiming Social Security
- Figuring out when is the optimal time to claim Social Security is an important part of retirement planning. SmartAsset’s Social Security calculator can help you estimate your benefits and plan ahead.
- If need additional help planning for Social Security and retirement, consider working with a financial advisor. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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