Joe Biden wants to change Social Security. He hasn’t tried to keep this a secret. In fact, Biden was campaigning for the presidency with a plan to shake up the federal program in several ways.
Some of the president’s proposals may cause controversy. But not all. Here’s a Social Security change that Biden wants most retirees should want too.
Raise the cap
As a presidential candidate, Biden pledged to “put Social Security on the path to long-term solvency.” Part of his plan would accomplish the most to accomplish this goal.
The president came up with the idea of making high-income Americans pay more payroll taxes. Specifically, he wants all income above $400,000 per year to be subject to the Federal Insurance Contributions Act (FICA) tax. FICA is a payroll tax that generates money for social security.
Currently, all income up to $147,000 per year is taxed at a rate of 12.4%. Employees pay half of this payroll tax, employers pay the other half. (The self-employed must pay the full amount as they are both employees and employers.)
Biden’s plan would create a “donut hole” where income between $147,000 and $400,000 would not be subject to the FICA tax. However, the current maximum tax amount will not remain at $147,000; it would increase regularly. As a result, this “donut hole” would diminish over time and probably eventually disappear altogether.
Why retirees should like this change?
Tax increases are often not very popular. However, this proposal is an exception that most retirees would want for two main reasons.
Firstly, social security must absolutely generate more money, otherwise benefits will have to be cut sharply in the future. As of now, the program is expected to become insolvent in 2034. No retiree who relies on his Social Security check as a major source of income wants this to happen.
Raising the ceiling on income subject to the FICA tax would help prevent massive cuts in benefits. The University of Maryland has estimated that taxing an annual income of $400,000 or more would eliminate 61% of the expected Social Security deficit.
Second, Biden’s proposed tax hike would have no effect on most Americans. According to the IRS, only 1.8% of U.S. households made more than $400,000 in 2019. However, the positive effect of maintaining Social Security benefits would be felt by most retirees.
Unsurprisingly, the idea of raising the threshold for FICA taxes is getting strong bipartisan support among Americans. A June 2022 survey conducted by the University of Maryland’s Public Consultation Program found that 88% of Democrats and 79% of Republicans prefer to subject all income above $400,000 to payroll taxes for social security.
Will it happen?
There is a strong argument that raising the FICA ceiling is the Social Security change Biden wants most likely to happen. It would strengthen the program financially. It negatively affects a relatively small group of Americans while helping a large number of retirees. It is popular with both Democrats and Republicans.
Rep. John Larson (D-Conn.) has filed a bill with the US House of Representatives requiring Social Security payroll taxes to be applied to income over $400,000. Is it a slam dunk? Not really. It seems unlikely that it will eventually become law. The bill has not attracted any GOP co-sponsors.
The plan to raise the FICA threshold to bolster Social Security is likely to happen at some point, whether the cap is $400,000 or some other amount. There just aren’t many other good options for avoiding big payouts. Even increasing the full retirement age by a few years would not be enough.
However, the political reality is that the change to raise payroll taxes is unlikely to come into effect anytime soon. And it may not even happen under Joe Biden’s supervision.