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Of course, other changes may also be on the table.
Sens. Angus King, I-Maine, and Bill Cassidy, R-La., are reportedly leading a bipartisan coalition to propose changes including raising the retirement age to 70. Their plan also reportedly includes creating a sovereign wealth fund, this could invest the social security money in stocks. If the returns on these funds are too low, this could result in more wages being subject to payroll taxes and higher rates on these taxes.
Cassidy and King spokespeople declined to provide further details, saying the plan is ongoing.
Meanwhile, Senate Democrats, led by Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., last month reinstated legislation calling for the reinstatement of the Social Security tax on wages over $250,000. Also, wealthy individuals would have to pay a 12.4% tax on business and capital gains. The plan would also add $2,400 per year to the benefits.
Discussion over how to shore up Social Security has grown since President Joe Biden’s State of the Union address, in which he urged both sides of the aisle to pledge not to cut the program.
“I will not cut any Social Security or Medicare benefits,” the president vowed at an event in Florida later that same week.
But the clock is ticking to support the program.
A recent report from the Congressional Budget Office predicted that the combined Social Security funds could expire in 2033, two years earlier than Social Security actuaries estimated last year. Once these depletion dates are reached, this would mean performance reductions of 23% and 20%, respectively.
Changes to prevent these cuts can have a profound impact on Americans’ pensions and the distribution of US wealth.
Raising the retirement age can mean a 20% reduction in benefits
The full social security retirement age is gradually being raised to 67, based on the 1983 amendments.
Legislators are considering raising the full retirement age back to 70 years.
“This is absolutely a benefit cut,” said Kathleen Romig, director of social security and disability policy at the Center on Budget and Policy Priorities.
The change would result in a 20% cut across the board on lifetime benefits, she noted.
People who retire at 62, the earliest eligibility age, would experience a 43% reduction in their full benefit, according to Romig. For example, a benefit of $1,000 would be reduced to $570.
“It would be hard for people to absorb this cut,” she said.
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While delaying benefits could help increase a beneficiary’s monthly checks, many people are unable to do so.
In 2021, 3 in 10 Social Security recipients aged 62 applied. Of those who filed claims at that age, about a quarter had already stopped working, Romig found.
The most common reasons for early retirement were job loss, health problems or caring responsibilities.
Current beneficiaries and near retirees would likely be spared changes in retirement ages. But younger generations might feel the pinch. The Republican Studies Committee’s budget, introduced by the House Speakers, calls for raising the full retirement age to 70 for people born in 1978 or later.
Changes in payroll taxes could target wealth inequality
In 1983, 90% of income was subject to Social Security taxes, a record high after reforms introduced by Congress, according to the Economic Policy Institute. In 2021, 81.4% of all wages were subject to social security contributions as income inequality has caused more incomes of high-wage workers to fall above the ceiling.
This decline has caused large revenue drops for Social Security.
Cumulative losses since 1983 mean the Social Security Trust fund had 50% fewer reserves, or $1.4 trillion, as of 2022, according to the Economic Policy Institute. About $26 billion in revenue was lost between 2019 and 2021.
“It’s pretty clear that we need to tax the wages of higher earners that exceed this Social Security ceiling,” said Elise Gould, senior economist at the Economic Policy Institute.
In 2023, $160,200 of income is subject to Social Security payroll taxes. The tax rate is 6.2% for employees and employers and 12.4% for employees who are self-employed.
Warren and Sanders are calling for the reinstatement of Social Security tax on income over $250,000 and taxing certain business and capital gains at 12.4%.
Lawmakers should at least consider raising the income cap to a level that results in 90% of earnings being subject to Social Security tax, the Economic Policy Institute recommends.
“If we went back to that 90%, it would increase revenue significantly,” Gould said.
Executives face tough compromises as the debt ceiling looms
With Democrats opposed to benefit cuts and Republicans opposed to higher taxes, finding a compromise to fix the program won’t be easy.
It will be crucial to look at the full impact of any reform package, said Shai Akabas, director of economic policy at the Bipartisan Policy Center.
A higher retirement age could be accompanied by other changes, such as a robust minimum benefit that can protect people at the bottom of the income distribution, Akabas said.
Just raising payroll taxes — with no benefit cuts — could raise enough money to shore up the program.
But some experts wonder if that would account for if other tax hikes are needed to meet the country’s needs.
“If we just rely on more revenue from high-income people to solve this problem, we won’t be able to endlessly use that for other priorities that we have as a country, like massive public debt,” he said Aqaba.
It’s “dangerous” to think about Social Security without looking at the entire budget, said Maya MacGuineas, president of the Federal Budget Committee.
“It’s very easy for people to pretend it’s there [an] infinity [of] resources in our budget and there aren’t any,” she said.
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