Social Security is in trouble. In the coming years, the program is expected to spend more on scheduled benefits than it brings in in revenue. And we can thank the baby boomers for that.
In the next ten years, the baby boomers will leave the labor market en masse. To be clear, that’s an option they’re more than entitled to. But that mass exodus could give Social Security a double whammy.
Social security’s main source of income is payroll taxes. If that source of income shrinks at a time when more seniors start filing benefit claims, the program tends to quickly use up its cash reserves called trust funds.
Meanwhile, Social Security trust funds are expected to dry up in 2035, according to the program’s latest Trustees Report. As soon as that happens, the benefits will be on the table.
President Biden does not want that to happen. As such, he has put forward a proposal whereby higher income earners pay more tax to Social Security. But while his plan may deal a blow to higher-income workers, there is another proposal that is even more extreme.
Higher earners may have to pay more
A wage cap is put in place each year that determines how much income is subject to Social Security taxes. This year, the wage cap is at $147,000 and is likely to rise in 2023.
Biden’s proposal is to impose additional Social Security taxes on earners with incomes over $400,000. Here’s how that would work.
Let’s say the Social Security pay cap is set at $150,000. Someone making $450,000 a year would pay Social Security taxes on their first $150,000 in income, and then no tax on their next $250,000 in income. However, those taxes would then apply to their last $50,000 in earnings.
Critics of Biden’s proposal might say it burdens the rich unnecessarily, especially if income above the wage cap also doesn’t count toward calculating future Social Security benefits, which is currently the case. (Only wages up to the annual cap are included in the formula that calculates benefits.) But as tough as Biden’s plan may seem, there’s another proposal that seeks to impose additional Social Security taxes at an even lower income threshold.
Earlier this year, Senators Bernie Sanders and Elizabeth Warren introduced legislation designed to bolster Social Security finances and prevent benefits. But to achieve that goal, their proposal seeks to reintroduce Social Security taxes on incomes over $250,000 a year, not $400,000. Plus, those taxes wouldn’t just apply to job income — they’d also apply to capital gains.
Big changes need to happen soon
Social Security is just over a decade away from depleting its trust funds — and that’s assuming the most recent timeline sticks. It is more than possible that the Social Security Trustees will announce an earlier expected exhaustion date in next year’s report.
As such, lawmakers really can’t wait to address the program’s financial problems. On the contrary, they have to act quickly.
This does not mean that any of the above proposals are guaranteed to make progress. But that’s an obvious opportunity that higher earners should prepare for.