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.
Trust Fund Depletion
Experts have been warning about the potential depletion of the Social Security Trust Fund. If no changes are made, the current funds could run out in about ten years. Projections suggest that by 2035, the Social Security Administration (SSA) will only be able to pay 83% of the promised benefits to retirees.
New Proposals
To prevent cuts in benefits, lawmakers are exploring different strategies to boost funding. While no proposal has been finalized, the SSA’s Office of the Chief Actuary suggests that removing the taxable maximum could help preserve benefits until 2060, assuming current salary trends continue.
Taxable Maximum
The taxable maximum is the income level up to which earnings are taxed for Social Security. In 2024, this maximum is set at $168,600. Income above this amount isn’t subject to Social Security payroll taxes. By taxing higher-income individuals more, it could address about two-thirds of the funding shortfall, according to SSA estimates.
Expert Insights
Mary Johnson, a Social Security and Medicare analyst, believes that applying the Social Security payroll tax to all earnings is crucial. She highlighted that currently, 90% of Social Security funding comes from low- and middle-income workers, which she says is unfair.
Historical Context
Significant reforms to Social Security haven’t happened in decades. In 1984, 90% of American earnings were below the taxable maximum, but income levels have increased since then. Some experts worry that removing the taxable maximum might lead to higher benefits for high earners, which could strain the program further.
Previous Proposals
There have been previous attempts to address this issue. In 2022, Senator Mazie Hirono proposed a 12.4% payroll tax on all earnings, and Senator Bernie Sanders suggested taxing income above $250,000. However, none of these proposals were enacted.
The Expert’s Take
Michael Peterson, CEO of the Peter G. Peterson Foundation, warns that Social Security’s future is unstable. Without action, there could be a 21% cut to all beneficiaries in just nine years. Meanwhile, financial literacy instructor Alex Beene notes that while increasing taxes might be challenging politically, it’s essential to consider the impact on Americans who rely on Social Security.
Kevin Thompson, founder of 9i Capital Group, supports changes to increase funding but cautions that it might lead to tax code manipulation. This could put a heavier tax burden on W-2 workers and shift income away from the maximum wage base.
What is the Social Security Trust Fund, and why is it in trouble?
Answer: The Social Security Trust Fund is a reserve of money used to pay benefits to retirees, disabled individuals, and survivors. Experts warn that it might run out in about ten years if no changes are made, leading to significant cuts in benefits.
What does the new proposal suggest to address the funding issue?
Answer: The proposal suggests eliminating the taxable maximum—currently set at $168,600 in 2024—to increase funding for Social Security. This change could help extend the program’s funding until 2060.
What is the taxable maximum?
Answer: The taxable maximum is the income level up to which earnings are taxed for Social Security. For 2024, this amount is $168,600. Income above this limit is not subject to Social Security payroll taxes.
