A proposal would cap Social Security at $100,000. Will it fly?
A Washington think tank caused a stir recently with a paper that proposed capping annual Social Security benefits at $100,000 to shore up the retirement trust fund.
Social Security faces a shortfall as soon as 2032. If Congress does nothing, research suggests, retirees will see a 28% cut in monthly benefits.
But the “Six Figure Limit” proposal, pitched in March by the nonpartisan Committee for a Responsible Federal Budget, drew swift rebukes. Retirement advocates see any cap or cut in Social Security benefits as a slippery slope.
Fortunately, there’s no shortage of other ideas for fixing Social Security.
“You and I could do it in an hour,” said Alicia Munnell, senior adviser at the Center for Retirement Research at Boston College, speaking to USA TODAY in April. “It is not hard. It is just a question of will, which is totally missing.”
Congress will walk a perilous path in reforming Social Security, a program so precious to so many that it’s often termed the third rail in American politics.
Here are eight of the most popular proposals for closing Social Security’s funding gap, and the pros and cons of each.
Raise the cap on income taxed for Social Security
Social Security revenues come from a tax on incomes. But there’s a cap: In 2026, only incomes up to $184,500 are taxed to fund the benefits.
Raising the income cap would deliver more taxes to fund Social Security.
One proposal would raise the income limit to a level that covers 90% of all wages. The current limit covers just over 80% of all income. Setting it at 90% would put the limit around $330,500, according to the nonpartisan Committee for a Responsible Federal Budget.
That fix, by itself, would close 26% of the Social Security funding gap, the CRFB estimates.
Remove the income cap
A more drastic option: Remove the income cap so that all worker income is taxed for Social Security.
Eliminating the income cap would close 68% of the Social Security shortfall, CRFB estimates.
The argument against it: Scrapping the cap would burden high earners. Already, top earners receive a much smaller share of their past income in Social Security benefits than lower-income Americans.
Increase the payroll tax rate
The money Americans pay into Social Security comes from a payroll tax. The total tax is 12.4% of your income, half paid by you, half by your employer.
A one-point increase in that tax rate, to 13.4%, would close roughly one-quarter of the Social Security funding gap, CRFB estimates. A two-point increase would close half of it.
The big downside: It’s a tax increase.
Extend the payroll tax to health benefits
Under current law, the payroll tax applies only to income, and not to other forms of compensation, like health insurance.
Extending the payroll tax to cover employer health insurance contributions would close 23% of the Social Security shortfall, the CRFB estimates.
Raise the Social Security retirement age
Until the 1980s, 65 was termed the “full” retirement age for receiving Social Security. In 1983, with Social Security facing insolvency, Congress passed legislation that gradually raised the full retirement age to 67.
That’s the age when you qualify for full Social Security benefits. You can claim earlier, but your check is smaller. You can also claim later and reap an even larger payment.
With a new shortfall looming, one potential fix would raise the retirement age again. A one-year increase would close 12% of the Social Security funding gap, CRFB estimates.
Index retirement age to life expectancy
One downside to raising the retirement age is that any age you pick – 65, 67 or 68 – might seem arbitrary.
A more fact-based alternative might be to index Social Security’s retirement age to hard data on human life expectancy.
In this proposal, the “full” retirement age would move up or down with changes in life expectancy, which has generally been rising over time.
The policy change would close 18% of the Social Security funding gap, CRFB estimates.
One drawback: Critics say raising the retirement age would unfairly disadvantage low-income Americans. Research shows a link between income and longevity: Older Americans living in poverty tend to die several years sooner than high earners.
Slow benefit growth for higher earners
Social Security benefits are progressive: The lower your income, the more of it you get back in your Social Security checks.
Under current law, Social Security “replaces” 90% of your income up to $1,286 a 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 percentages could save money. One proposal would add a fourth bracket, with replacement rates dropping from 90% to 30%, 10% and 5% as income rises.
The math is complicated, but the CRFB estimates the change would close 41% of the Social Security funding gap.
Cap Social Security benefits
A final proposal calls for capping the total Social Security benefit retirees can draw in a year. Recently, the CRFB suggested capping benefits at $100,000 for couples, $50,000 for single retirees.
That cap, indexed to inflation for future years, would close at least one-fifth of Social Security’s funding gap, CRFB estimates.
Critics warn, though, that a benefit cap could eat into benefits for the middle class.
This article originally appeared on USA TODAY: Should Social Security benefits be capped at $100,000?