Social Security is in trouble. In the coming years, the program is expected to spend more on scheduled benefits than it collects in revenue. And we can thank baby boomers for that.
Over the next decade, baby boomers will be leaving the workforce in droves. To be clear, that’s an option they’re more than entitled to. But that mass exodus may deal Social Security a double whammy.
Social Security’s main revenue source is payroll taxes. If that revenue source shrinks at a time when more seniors start filing benefit claims, the program is apt to rapidly use up its cash reserves, known as its trust funds.
Meanwhile, Social Security’s trust funds are expected to run dry in 2035, as per the program’s latest Trustees Report. Once that happens, benefit cuts will be on the table.
President Biden doesn’t want to see that happen. As such, he’s put forth a proposal that has higher earners paying more taxes into Social Security. But while his plan might deal a blow to workers with higher incomes, there’s another proposal out there that’s even more extreme.
Higher earners may have to pay more
Each year, there’s a wage cap put into place that dictates how much income is subject to Social Security taxes. This year, the wage cap sits at $147,000 and is likely to increase in 2023.
Biden’s proposal is to impose added Social Security taxes on earners with incomes above $400,000. Here’s how that would work.
Let’s say the Social Security wage cap is set at $150,000. Someone earning $450,000 a year would pay Social Security taxes on their first $150,000 of earnings, and then no taxes on their next $250,000 of income. However, those taxes would then apply to their last $50,000 of earnings.
Critics of Biden’s proposal might say that it places an undue burden on the wealthy — especially if earnings above the wage cap also don’t count toward calculating future Social Security benefits, which is currently the case. (Only wages up to the annual cap are factored into the formula that calculates benefits.) But as harsh as Biden’s plan might seem, there’s another proposal that’s seeking 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 shore up Social Security’s finances and prevent benefit cuts. But to achieve that goal, their proposal seeks to reintroduce Social Security taxes on income above $250,000 a year, not $400,000. Furthermore, those taxes wouldn’t just apply to income from a job — they’d also apply to capital gains.
Big changes need to happen soon
Social Security is only a little more than a decade away from depleting its trust funds — and that assumes the most recent timeline sticks. It’s more than possible that in next-year’s report, the Social Security Trustees will announce an earlier projected depletion date.
As such, lawmakers really can’t wait to address the program’s financial woes. Rather, they need to act quickly.
This doesn’t mean that any of the above-mentioned proposals are guaranteed to move forward. But that’s a distinct possibility that higher earners will need to gear up for.
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