Are you worried about the future of Social Security? There’s some good news for retirees and future beneficiaries. A new proposal aims to extend the funding of the Social Security Trust Fund, but it might come with a catch—significant tax increases for Americans.
Contents
Trust Fund Depletion
Experts have been sounding alarms about the looming depletion of the Social Security Trust Fund. Without intervention, current funds are predicted to run dry in about a decade, leading to substantial cuts in benefits. Projections indicate that by 2035, the Social Security Administration (SSA) will only be able to distribute 83% of promised payments to retirees.
New Proposals
To prevent these reductions, lawmakers have introduced various strategies to bolster funding and secure future benefits. Although no proposal has yet hit the mark, the SSA’s Office of the Chief Actuary suggests that eliminating the taxable maximum would preserve benefits until 2060, based on current salary trends.
Taxable Maximum
The taxable maximum, which increases annually, stands at $168,600 in 2024. Anyone earning above this amount contributes the same in payroll taxes, regardless of their income level. Taxing higher-income individuals more could address about two-thirds of the funding shortfall, according to SSA estimates.
Expert Insights
Mary Johnson, an independent Social Security and Medicare analyst, emphasized the importance of applying the Social Security payroll tax to all earnings. This provision, she told MarketWatch, should be central to any major proposal to strengthen Social Security finances. She highlighted the current tax inequity, which shifts 90% of Social Security financing to low- and middle-income workers.
Historical Context
Major reforms to Social Security have not occurred in decades. In 1984, 90% of American earnings were beneath the taxable maximum. However, income levels have since surged. Some experts caution that eliminating the taxable maximum might result in higher earners receiving even greater benefits, potentially crippling the program.
Previous Proposals
Proposals to tax more income have been made before. In 2022, Senator Mazie Hirono proposed a 12.4% payroll tax on all earnings, and Senator Bernie Sanders suggested taxing income above $250,000. Yet, none of these proposals have been enacted.
The Expert’s Take
Michael Peterson, CEO of the Peter G. Peterson Foundation, warned Newsweek about Social Security’s unstable outlook and the severe automatic cuts that will occur if action isn’t taken soon. He stated that ignoring the issue would lead to 21% across-the-board cuts to all beneficiaries in just nine years.
Alex Beene, a financial literacy instructor, noted that passing these changes would likely be challenging in the current political climate. Many legislators oppose any tax increase, fearing it could negatively impact businesses and investments. However, Beene argued that it’s also crucial to consider the millions of Americans who would be devastatingly affected by substantial cuts to Social Security.
Kevin Thompson, founder of 9i Capital Group, emphasized the necessity of these changes. He believes that increasing funding would positively impact the longevity of the Social Security system. However, Thompson cautioned that such changes might prompt individuals to exploit the tax code, shifting income away from the maximum wage base and potentially putting a heavier tax burden on W-2 workers.
The future of Social Security is at a crossroads. While significant tax increases might be the solution to extending the program’s funding, they come with potential drawbacks and challenges. As the debate continues, it’s crucial to consider the impacts on all Americans—both current beneficiaries and future retirees.
FAQs
When will Social Security funds run out?
By 2035, only 83% of payments can be distributed.
What is the taxable maximum in 2024?
It’s $168,600.
Who benefits most from eliminating the taxable maximum?
Mainly higher-income individuals.
What did Mary Johnson emphasize?
Applying payroll tax to all earnings.
What did Michael Peterson warn about?
Severe automatic cuts without action.
