A six-figure limit on Social Security benefits?
Sometime around 2033 or 2034, SS benefits will drop by ca. 23% if nothing is done.
One frequent proposal is to remove the cap on payroll taxes. There are at least two problems with this: (1) the wealthiest Americans derive most of their income from non-salary sources, and (2) this just turns SS into welfare, and we already know what Congress does with welfare. SS is retirement insurance paid for by workers. Let’s keep it that way.
Another proposal is to cap benefits:
“The very highest income couples can now collect $100,000 a year in Social Security benefits.”
That’s gross income, not net income. Couples making $100K/yr pay income taxes on 85% of that. They don’t pocket all $100K, and the more taxable income they have outside of SS, the more tax they pay on the SS income as that income puts them into a higher tax bracket. Furthermore, the Federal income taxes on SS benefits *don’t* go into the General Fund like the rest of federal income taxes. These funds are directed *entirely* into the SS and Medicare Trust Funds, where they help pay current and future benefits. The proposed caps of $50K on individual benefits and $100K on joint benefits isn’t such a big savings for SS when that trade-off is factored in.
A far more effective tool for SS sustainability would be to raise the payroll tax.
Capping Social Security benefits
One frequent proposal is to remove the cap on payroll taxes. There are at least two problems with this: (1) the wealthiest Americans derive most of their income from non-salary sources, and (2) this just turns SS into welfare, and we already know what Congress does with welfare. SS is retirement insurance paid for by workers. Let’s keep it that way.
Another proposal is to cap benefits:
“The very highest income couples can now collect $100,000 a year in Social Security benefits.”
That’s gross income, not net income. Couples making $100K/yr pay income taxes on 85% of that. They don’t pocket all $100K, and the more taxable income they have outside of SS, the more tax they pay on the SS income as that income puts them into a higher tax bracket. Furthermore, the Federal income taxes on SS benefits *don’t* go into the General Fund like the rest of federal income taxes. These funds are directed *entirely* into the SS and Medicare Trust Funds, where they help pay current and future benefits. The proposed caps of $50K on individual benefits and $100K on joint benefits isn’t such a big savings for SS when that trade-off is factored in.
A far more effective tool for SS sustainability would be to raise the payroll tax.
Capping Social Security benefits
From the CRFB linked article:
“The Inflation-Indexed SFL would reduce Social Security’s shortfall by nearly 1.0% of taxable payroll over 75 years and by 3.6% of payroll in 2099.”
The SS formula is indexed to average wage such that new benefits go up faster than CPI. That allows each new cohort to participate in the general increase in economic welfare. In a time when the people being let behind are more visible, voters doubt the general increase and are unaware of how AWI impacts benefits, but it does make sense.
They add a CPI index to the limit, so all of the growth in savings come from the difference between CPI and AWI. Their “solution” depends on changes in one of the least understood parts of the SS formula.
Additionally, there must be a flaw in CRFB’s analysis. Figure 3 in the linked article shows costs dropping without revenue dropping. As Joel describes, benefits are taxed (and Trump’s bill did not change that). If SFL actually reduced costs enough to show in the chart, it would be reducing revenue by an observable amount as well.
Rereading my comment I see my use of pronouns is confusing.
The use of AWI in the scheduled benefit formula is not well understood by most people, but there is a good reason for it.
CRFB’s capitalizes on the lack of familiarity.
Here is the Diagram you are discussing
A Six Figure Limit for Social Security