A new proposal emerged this week in the U.S. House of Representatives aimed at improving the financial standing of the Social Security program by repealing the federal taxation of benefits while phasing out the current wage cap on taxable earnings.
The bill is sponsored by Reps. Angie Craig, D-Minn., and Yadira Caraveo, D-Colo., and it is dubbed the You Earned It, You Keep It Act. According to the lawmakers, the proposed reforms would make the program fairer while also pushing out the projected insolvency date of the key Social Security retirement trust fund to 2054 — 20 years beyond the current projection of 2034.
This would principally be achieved by expanding payroll taxes to wages above $250,000. Currently such taxes are only imposed up to a cap that is indexed to inflation — $168,600 for 2024. The tax cap would continue to rise until it hits $250,000 and is effectively eliminated.
Effective in 2025, the proposal would eliminate the federal taxation of Social Security benefits for personal income tax filers. The trust would be held harmless, however, with transfers from the general fund of the Treasury to the three trust funds equivalent to the amount of revenue that would have been realized from taxation of benefits in the absence of this provision.
Responding to a request from Craig and Caraveo, the Office of the Chief Actuary of the Social Security Administration has published a detailed analysis of the bill's provisions and their potential effects on beneficiaries, government revenues and Social Security solvency.
The analysis shows that the You Earned It, You Keep It Act would also reduce the federal debt by $8.9 trillion over 75 years. This would occur because the transfers going to the trust funds from the Treasury's general fund, while sizable, would be significantly smaller than the positive increases in overall cash flows generated by phasing out the taxable maximum wage cap.
Here are seven key findings from the SSA's report:
1. The bill would keep the trust funds solvent until 2054.
Also, benefit cuts after the funds run out would be less severe, according to the SSA.
Under current law, 80% of scheduled benefits are projected to be payable on a timely basis in 2034 after depletion of the combined trust fund reserves, with the percentage payable declining to 74% for 2097.
Under the proposal, 91% of scheduled benefits are projected to be payable on a timely basis in 2054 after depletion of the combined trust fund reserves, with the percentage payable declining to 88% for 2097.
2. All earnings would likely be subject to the Social Security payroll tax by 2035.
As noted in the SSA report, the proposal would apply the combined Social Security payroll tax rate on covered earnings above $250,000 paid in 2025 and later.
Notably, the $250,000 level is not indexed to price inflation or changes in the average wage index. All covered earnings would be taxed once the current-law taxable maximum exceeds $250,000, which is projected to occur in 2035.
Any covered earnings above the higher of $250,000 or the current-law taxable maximum in a given year would be counted as additional earnings taxed and would be credited for benefit purposes via a formula spelled out in the proposal.
