All that may change again in Social Security – there is a new proposal

Amelia Ross
6 Min Read

Social Security is a crucial part of retirement planning for many Americans. Recent reports have raised concerns about the future of Social Security funding. To address these concerns, a new proposal aims to extend its funding. However, this would come with significant tax increases for Americans. In this article, we will explore the current state of Social Security, the proposed changes, and what they mean for you.

The Current State of Social Security

Funding Concerns

Experts predict that without intervention, Social Security funds will be exhausted in about a decade. This could lead to substantial cuts in monthly benefits for recipients. Current projections indicate that by 2035, the Social Security Administration (SSA) will only be able to distribute 83% of its promised payments to retirees.

Proposed Solutions

Lawmakers have introduced various strategies to bolster funding and secure retirement and disability benefits for future beneficiaries. The SSA’s Office of the Chief Actuary suggests that eliminating the taxable maximum would preserve benefits until 2060, considering current salary trends.

Understanding the Taxable Maximum

What is the Taxable Maximum?

The taxable maximum is the cap on income that is subject to Social Security taxes. For 2024, it stands at $168,600. This means anyone earning over that amount contributes the same in payroll taxes, regardless of whether they earn $200,000 or billions annually.

Proposed Changes

If higher-income individuals were taxed more, the SSA estimates that approximately two-thirds of the funding shortfall could be addressed. Mary Johnson, an independent Social Security and Medicare analyst, emphasized that applying the Social Security payroll tax to all earnings should be a central provision of any major proposal to strengthen Social Security finances.

The Debate on Tax Reforms

Arguments for Eliminating the Taxable Maximum

Proponents argue that the current system sets up a tremendous tax inequity by shifting 90 percent of the financing of Social Security benefits to low- and middle-income workers. Eliminating the taxable maximum could reduce a significant amount of the Social Security deficit.

Arguments Against Eliminating the Taxable Maximum

Some experts caution that eliminating the taxable maximum might result in higher earners receiving even greater benefits, surpassing the current SSA limits and potentially crippling the program. There are also concerns that higher taxation on higher-income individuals could negatively impact other investment classes, including businesses that provide jobs and benefits to others.

Previous Proposals

Proposals to tax more income have been made before. For example, in 2022, Senator Mazie Hirono proposed applying a 12.4 percent payroll tax to all earnings to safeguard the program. Senator Bernie Sanders’ Social Security Expansion Act suggested taxing income above $250,000. However, none of these proposals have been enacted to date.

Expert Opinions on Social Security Reform

Michael Peterson’s Perspective

Michael Peterson, CEO of the Peter G. Peterson Foundation, warns that far too many Americans are unaware of Social Security’s unstable outlook. He emphasizes that if no action is taken, severe automatic cuts will be necessary.

Alex Beene’s View

Alex Beene, a financial literacy instructor, notes that passing these changes would likely be challenging in the current political climate. Many legislators have dismissed any tax increase, regardless of whether the primary group affected is strictly high income or not.

Kevin Thompson’s Insight

Kevin Thompson, a finance expert, asserts that if more money is going into the system, the longevity of that system would be impacted positively. However, he cautions that such changes might prompt individuals to start new companies to exploit the tax code and shift their income away from the maximum wage base.

The future of Social Security funding is uncertain, and significant changes are needed to ensure its stability. While proposals to increase taxes on higher-income individuals could address the funding shortfall, they also come with potential drawbacks. It is crucial for lawmakers to find a balanced solution that ensures the longevity of Social Security without negatively impacting other areas of the economy.

FAQs

1. What is Social Security?

Social Security is a government program that provides financial assistance to retirees, disabled individuals, and survivors of deceased workers.

2. What is the Social Security Trust Fund?

The Social Security Trust Fund is a reserve of money collected from payroll taxes that is used to pay benefits to eligible individuals.

3. What is the taxable maximum?

The taxable maximum is the cap on income that is subject to Social Security taxes. For 2024, it is set at $168,600.

4. Why is there a funding shortfall in Social Security?

There is a funding shortfall because the current payroll taxes are not sufficient to cover the benefits promised to future retirees.

5. What are the proposed changes to Social Security funding?

Proposed changes include eliminating the taxable maximum, which would require higher-income individuals to pay more in Social Security taxes.

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