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Regulation and Compliance > Legislation

New Social Security Bill Phases Out Payroll Tax Cap

By Melanie Waddell

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What You Need to Know

  • The bill phases out the cap on wages subject to the FICA taxes that fund Social Security.
  • It also would use the Consumer Price Index for the Elderly (CPI-E) to calculate the relevant COLA.
  • Under the bill, the Social Security system would pay scheduled benefits in full and on time for an additional 19 years, lawmakers said.

New legislation would phase out the wage cap on the payroll taxes that fund Social Security over the next seven years and encourage contributions “above the cap in exchange for additional benefits.”

Phasing out the cap on wages subject to Social Security contributions would ensure “that all benefits can be paid in full and on time for the foreseeable future,” according to Sen. Mazie K. Hirono and Rep. Jill Tokuda, the Hawaii Democrats co-sponsoring the Protecting and Preserving Social Security Act, introduced on Aug. 2.

Related: Top 10 Things Investors Get Wrong About Social Security

The Hirono-Tokuda bill would also use the index formerly known as the Consumer Price Index for the Elderly (CPI-E) to calculate the relevant cost-of-living adjustment (COLA), rather than the more generic Consumer Price Index for Urban Wage Earners (CPI-W).

Sen. Bob Casey, D-Pa., chairman of the Senate Special Committee on Aging, introduced similar legislation in March, the Boosting Benefits and COLAs for Seniors Act, that would direct the Social Security Administration to adjust benefits based on CPI-E.

Phase-In Is ‘Clever’

In 2024, the Social Security tax known as FICA “is assessed against all wages up to a maximum of $168,600,” Nancy Altman, president of Social Security Works, told ThinkAdvisor Monday in an email.

“This proposal calls for the assessment against all wages (though no unearned income, as some other Democratic proposals do), phased in over 7 years. Since FICA is 12.4% of the wages, the phase in is clever,” Altman said. “One-seventh of the 12.4% or 1.8% of all wages in year one, up to 12.4% of all income in year 7. Those contributing more would receive higher benefits.”

One of Social Security’s “most important features is an annual automatic cost-of-living adjustment, so benefits don’t erode over time,” Altman said. “Unfortunately, the current measure is out of date and under-measures the costs experienced by Social Security beneficiaries. Both bills update that important measure.”

Social Security Lifeline

The bill “will make significant progress toward extending the Social Security lifeline,” Hirono and Tokuda said in a statement.

According to the Social Security Administration’s Office of the Chief Actuary, the Protecting and Preserving Social Security Act is expected to extend the ability of the Old Age, Survivors, and Disability Insurance (OASDI) program to pay scheduled benefits in full and on time for an additional 19 years, moving the date of projected depletion from 2035 to 2054, the lawmakers said.

The bill would also reduce the federal deficit by approximately $13.3 trillion by the end of the 75-year projection period, according to the chief actuary.

The bill is co-sponsored by Sens. Jeff Merkley, D-Ore. and Tina Smith, D-Minn., as well as Reps. Steve Cohen, D-Tenn. and Jan Schakowsky, D-Ill.

The Protecting and Preserving Social Security Act is endorsed by the National Committee to Preserve Social Security and Medicare (NCPSSM); Alliance for Retired Americans (ARA); and Social Security Works.

“By adopting the CPI-E as the measure for calculating COLAs, the legislation assures that the purchasing power of Social Security benefits are more fully protected from the ravages of inflation, Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare, said in a statement. “This legislation represents a bold step on behalf of seniors and all Americans.”

Melanie Waddell

@Think_MelanieW

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