- Lawmakers on both sides of the aisle agree: Social Security reform needs to happen.
- One House Democratic proposal that would expand benefits and raise payroll taxes is getting a lot of attention on Capitol Hill.
- But the proposed changes have sparked a debate: How much is too much when it comes to tax increases?
When Rep. John Larson, D-Conn., travels the country to talk about his plan for Social Security reform, he often holds up a Starbucks coffee cup.
The cost of that latte — about $4.50 — could also cover nine weeks of Social Security payments if you’re making $50,000 per year, Larson said he points out to seniors on those visits.
“Can we do this, America?” Larson said he typically asks those crowds, in an interview with CNBC.com in June. Many answer with affirmative nods of their heads.
Congressional lawmakers will face that same question when they return from recess this fall to debate the Social Security 2100 Act.
Judging by a recent House Ways and Means Committee hearing on the topic, lawmakers will likely be divided along party lines. The bill currently has 210 co-sponsors. A mark-up is expected this fall. Supporters hope that will be followed by a House floor vote.
Much of whether it gets the go-ahead depends one question: How much are you willing to spend to shore up the country’s legacy insurance and anti-poverty program?
This week, Social Security marked its 84th anniversary. Still, the program’s future is in question, with its trust funds scheduled to become depleted in 2035. If nothing changes, just 80% of promised benefits will be payable at that time.
Experts agree that there are a few ways to extend Social Security’s solvency: raise taxes, cut benefits or do a combination of both.
The Social Security 2100 Act would mostly raise taxes while avoiding benefit cuts.
It would include a 2% boost to the average benefit for both current and new beneficiaries. It would also set the minimum benefit at 25% above the poverty line.
The plan also includes a tax cut by raising the amount of non-Social Security income recipients can earn before their benefits are taxed. The new thresholds would be $50,000 for individuals and $100,000 for couples, up from $25,000 and $32,000, respectively, today.
The proposal also calls for tax hikes. That includes introducing payroll taxes on wages above $400,000, or the top 0.4% of earners. Currently, payroll taxes are not collected on wages over $132,900. (This is separate from federal income taxes.)
The bill would also raise payroll tax rates for both workers and employers, up to 7.4% each from its current 6.2%. That change would be phased in between 2020 and 2043.
This would cost just 50 cents more per week for the average worker who earns $50,000, according to the proposal.
Focus on costs
How much of a burden that payroll tax increase would be – and whether it would just be the price of a cup of coffee – is a sticking point between critics and supporters.
The coffee cost analogy only works for the first year, said Rachel Greszler, research fellow at the Heritage Foundation. Even then, it’s misleading because it only refers to the amount the worker pays, she said, and not what employers would be on the hook to contribute.
Plus, in the long term, that 2.4% tax increase for someone who earns $50,000 a year would be $1,200 per year. That would add up to $600 apiece for the employee and employer.
“That’s a lot more than a cup of coffee,” Greszler said. “That’s more like people’s grocery bills that they’re paying.”
Kelly Brozyna, founder and president of the Colorado Business Development Foundation, who testified at the recent House Ways and Means Committee hearing, said she fears the effect the tax increase would have on younger workers, including her daughter, a recent college graduate.
Brozyna’s daughter is living in the Boston area while working at her dream job at a travel company. She earns $45,000. That means she must diligently manage her money, including packing her lunch every day.
“She’s not going to Starbucks and getting a latte,” Brozyna said.
Brozyna said she fears the 1.2% tax increase, or $540, would price her out of her lifestyle completely.
That point prompted further questioning from Rep. Earl Blumenauer, D-Ore., after which it was revealed that the tax increase would be phased in over 24 years.
“So that won’t affect whether she buys a latte or not today?” Blumenauer said. “For her, this year, next year, the following, it’s 50 cents a week.”
Nancy Altman, president of advocacy organization Social Security Works, responded, “As Chairman Larson always says, ‘If she does buy a latte, this is a much better investment.’”
Other fixes needed
Rep. Tom Reed, R-N.Y., interjected a bit of humor to drive his objections home.
The congressman brandished an oversized coffee mug at the hearing with the word “more” written on it.
“This is the more size cup of coffee that we’ve got to fight in regards to the tax increases we’re looking at with this payroll tax,” Reed said.
“We’ll fight these tax increases on our side,” he added.
Reed, the son of a widow who he said raised 12 children on Social Security benefits, called for other fixes. Immigration reform could help usher in thousands of paying workers into the system, he said. Plus, reforming one rule that cuts public workers’ benefits could put more money in their families’ pockets.
Experts say Social Security fixes such as tax increases will be less painful if they’re put in place now, rather than down the road.
“The quicker we do it, the more people would be paying into the system,” said Richard Johnson, director of the program on retirement policy at the Urban Institute. “That would make the costs lower for each generation.”
How both sides will reach a compromise on the issue is still not clear.
Perhaps they can get together and talk about it — over coffee.
by Paul B. Burkhalter Managing Partner of Morgan & Weisbrod, Board Certified in Social Security Disability Law.