The future of Social Security has been of major concern to many political leaders, especially given the deteriorating retirement outlook for most Americans.
Congressional Democrats have been pushing for years for a major Social Security reform proposal. Last week, emboldened by their House majority, more than 200 House members co-sponsored the reintroduction of a reform bill into the new Congress.
The bill, called the Social Security 2100 Act, would raise Social Security benefits, especially for lower-income recipients, and be the most significant change in Social Security in nearly 50 years.
If the House passes the bill, and Senate Republicans balk at considering the measure in their chamber, it could create a potent 2020 election issue.
A pathway to self-funding
The 2100 Act is no government giveaway plan. The measure would sharply raise payroll taxes over the next 20 years and require wealthier workers—those making more than $400,000 a year—to pay taxes on all earnings above that level.
In exchange, the financially challenged retirement system would become self-sustaining for at least 75 years. It would not add to government deficits, and would continue to be insulated from what has come to be an annual drama over federal government funding.
Putting Social Security on rock-solid financial ground would be an especially important step in creating a financial future that younger Americans could count on.
Watch out for the donut hole
In a clever legislative maneuver, the bill also would create a so-called “donut hole” that exempts most high-income wage earners from sharply higher payroll taxes. Right now, a 12.4% payroll tax (split between employee and employer contributions) is levied on the first $132,900 in annual wages. This payroll tax ceiling increases every year to keep pace with wage inflation.
There are no taxes paid on wages above the ceiling, which means uber-wealthy hedge fund managers can pay all their Social Security taxes in January while the rest of us toil for the entire year to do so.
The House bill would slap payroll taxes on these wealthy wage earners. But it would also create a donut hole that exempts wages between the tax ceiling and $400,000. Over time, as the tax ceiling is raised, the donut hole would shrink, and eventually disappear.
The cost of reform
Besides exempting a large segment of the public who otherwise might howl over higher Social Security taxes, the bill creates a gradual 20-year funding trajectory for higher program revenues.
Beginning in 2020, the combined 12.4% payroll tax rate would be increased by a tenth of a percentage point each year until it reached 14.8% in the year 2043.
Make no mistake. This would be a big increase, but it would support higher benefits, a more generous annual cost of living increase (COLA) that reflects the high price of health care for older Americans, and lower income tax rates on Social Security payments.
Enactment of this bill, or something like it, would mark a momentous achievement for both older and younger workers.
I’m not saying this bill is the best possible fix for the system. But I hope it generates vigorous debates that include serious consideration of many other proposals put forward in recent years.
This article originally appeared on Considerable.com and was syndicated by MediaFeed.org.
Featured Image Credit: Depositphotos.
