Think tank proposes capping Social Security benefits at $100,000
A Washington think tank has proposed capping annual Social Security benefits for married couples at $100,000 as a way to reduce a looming deficit in retirement trust funds.
Social Security is headed toward a fiscal cliff.
Retirement trust funds could face a shortage as early as 2032. Studies suggest that if Congress does nothing, retirees will see their monthly benefits cut by 28%.
Fortunately, there is no shortage of ideas for fixing Social Security.
“You and I can do it in an hour,” said Alicia Munnell, senior advisor at Boston University’s Center for Retirement Research. “It’s not difficult. It’s just a matter of will, and that’s completely lacking.”
Congress will tread a treacherous path in reforming Social Security, a program so valuable to many that it is often referred to as the third rail of American politics.
Andrew Biggs, a senior fellow at the libertarian group American Enterprise Institute, said all proposed amendments “ultimately come down to either more money coming into the system or less money leaving the system.” Simply put, increase profits or cut benefits.
Here are eight of the most popular proposals for closing Social Security’s funding gap, along with the pros and cons of each.
How to increase your revenue
Start with these four suggestions to increase your bottom line.
Raise the limit on income taxed for Social Security purposes
Social Security income comes from taxes on income. However, there is an upper limit. In 2026, only income up to $184,500 will be taxed to fund benefits.
Raising the income limit would result in more taxes being used to fund Social Security.
One proposal is to raise the income limit to a level that covers 90% of all wages.
The cuts “were kind of the goal” when Congress reformed Social Security in the 1980s, Munnell said. But for years, this cap has not kept pace with wage increases for high-income earners. The current limit covers just over 80% of total income.
Resetting the cap to 90% would bring the cap to about $330,500, according to the bipartisan Committee for a Responsible Federal Budget.
CRFB estimates that this amendment alone will close 26% of the Social Security funding gap.
Eliminate income caps
A more drastic option would be to eliminate the income cap so that all workers’ income is subject to Social Security taxes.
“The simple thing for me is to get rid of the cap,” said Monique Morrissey, senior economist at the Progressive Economic Policy Institute.
The CRFB estimates that removing income limits would eliminate 68% of the social security deficit.
The counterargument: Eliminating the cap would place the burden on high-income earners. Already, high-income Americans receive a much smaller share of their Social Security benefits from their past earnings than lower-income Americans.
increase payroll tax rate
The money Americans pay for Social Security comes from payroll taxes. Your total taxes are 12.4% of your income, half paid by you and half paid by your employer.
According to the CRFB’s calculations, a one-point increase in the tax rate to 13.4% would eliminate about a quarter of the social security funding shortfall. A 2 point increase will fill half of the gap.
One proposal would “raise it from 6.2% to 7.2% on both the employee and employer side,” Morrissey said, and would “do it in stages over 20 years.”
The big drawback is the tax increase. And that will come at a time when “we need more tax revenue for all the activities that government does,” Biggs said.
Filling the Social Security funding gap completely through payroll taxes would be “the largest peacetime tax increase in history,” he said, but much of it would be imposed “on a small portion of the population.”
Extend payroll taxes to include medical benefits
Under current law, payroll taxes apply only to income and not to other forms of compensation, such as health insurance.
CRFB estimates that extending payroll taxes to cover employer health insurance premiums would eliminate 23% of the Social Security shortfall.
“If we have to raise taxes, I think (this) is the least damaging way to do it,” said Romina Boccia, director of budget and rights policy at the libertarian Cato Institute.
Well, here are four proposals to cut benefits.
Raise the Social Security retirement age
Until the 1980s, age 65 was referred to as the “full” retirement age for receiving Social Security benefits. In 1983, with Social Security facing bankruptcy, Congress passed legislation to gradually raise the full retirement age to 67.
That is the age at which you can receive full Social Security benefits. You can claim early, but your check will be for a smaller amount. You can also claim later and receive a larger payment.
With new shortages looming, a solution could see the retirement age raised again. The CRFB estimates that the one-year increase will close 12% of the Social Security funding gap.
Convert retirement age to life expectancy
One of the downsides to raising the retirement age is that whatever age you choose, be it 65, 67, or 68, can seem arbitrary.
A more fact-based alternative, Boccia suggests, is to index Social Security retirement age to hard data about human life expectancy.
“Benefits are already linked to various government measures,” she said. “We do the same thing with retirement age. That changes as life expectancy changes.”
The proposal would raise or lower the “full” retirement age in response to changes in life expectancy, which generally increases over time.
CRFB estimates that the policy change would close the social security funding gap by 18%.
One drawback: Critics argue that raising the retirement age would unfairly disadvantage low-income Americans. Research shows that there is a link between income and longevity. Older Americans living in poverty tend to die years earlier than those with higher incomes.
Raising the retirement age “will hit low-income people hard,” Munnell said.
Slow growth in benefits for high-income earners
Social Security benefits are progressive. The lower your income, the more money you’ll get back in your Social Security check.
Under current law, Social Security “replaces” 90% of your income up to $1,286 per month. The replacement rate drops to 32% for incomes between $1,286 and $7,749, and to 15% for incomes above $7,749.
Changing the percentage can potentially save you money. One proposal would add a fourth bracket in which the replacement rate would fall from 90% to 30%, 10%, and 5% as income increases.
Although the calculations are complex, the CRFB estimates that this change would eliminate 41% of the Social Security funding gap.
Maximum social security benefits
The final proposal calls for capping the total amount of Social Security benefits retirees can receive in a year. The CRFB recently proposed capping benefits at $100,000 for married couples and $50,000 for single retirees.
The CRFB estimates that a “six-digit limit” on benefits tied to future inflation would eliminate at least one-fifth of Social Security’s funding shortfall.
“The idea that everyone needs $100,000 in Social Security benefits is crazy,” said Biggs, an early supporter of the cap.
But critics warn that caps on benefits could eat into benefits for the middle class.
“In Santa Cruz, which is a wealthy enclave of California, $50,000 a year is low income,” Morrissey said. “Just making ends meet is not enough.”
