On February 16th, Sen. Bernie Sanders and Rep. DeFazio announced joint legislation with a promise that changes would expand Social Security benefits and promises to stabilize the system finances for decades.
While the proposal has little chance of success in the GOP control houses of Congress, it does reflect changes in the discussion of Social Security that advisors should monitor for their clients.
On the surface, the proposal would rebalance the distribution of benefits, and draw in more revenue from high-wage earners. A deeper look at the details however suggests that the legislation does a lot more than tax income earners over $250,000.
If enacted, the law would create two new sources of revenue both of which would be drawn primarily from wealthier Americans. First, the law would eliminate the cap on wages subject to payroll taxes over 20 years. Second, it would impose a 6.2 percent levy on income structured like the tax on investment income for Obamacare.
More significantly, this proposal would abandon the historical relationship between taxes and future benefits. A majority of the revenue collected under this proposal would not earn credit towards the calculation of future benefits.
Starting in 2018, American workers covered by Social Security would pay a tax on the first $127,200 of wages, and those wages above $250,000. That pocket of protection would slowly decrease every year as the baseline increases annually and the top of the range is fixed. Separately, taxpayers would face a 6.2 percent tax on investment income over $200,000 for singles and $250,000 for joint filers.
In theory, the proposed changes would extend the expectation for the program’s ability to pay full benefits for 61 years or 2078 if the economy cooperates. The promise of solvency largely depends upon our children being more willing to pay taxes than current voters have been. The analysis of the Social Security Administration suggests that future workers will pay more than current voters. The increase in revenue in terms of GDP is expected to rise steadily from .7 percent of GDP to 1.25 percent.