The GOP recently announced its proposal to eliminate Social Security’s funding gap with large benefit reductions accompanied by tax cuts on affluent retirees, but with no rise in revenue to the system through tax increases. House Ways and Means Social Security Subcommittee Chairman Sam Johnson, R-Texas, introduced the Social Security Reform Act of 2016, a bill that intends to keep the system solvent for 75 years. Currently, Social Security faces a projected 21 percent across-the-board benefit reduction in 2034 if the system isn’t reformed by legislation.
The Social Security Office of the Actuary projects that Johnson’s proposal would make the Social Security trust fund fully solvent for 75 years, eliminate the current-law unfunded obligation of $11.4 trillion and produce an increase in the funded status of $11.9 trillion. That’s the net result of:
- a $2 trillion decrease in revenue to the system by eliminating income taxes on Social Security benefits of affluent retirees, and
- a $13.9 trillion decrease in the total value of benefits paid, primarily due to changing the benefit formula, reining in cost-of-living adjustments (COLAs) for retirees and increasing the normal retirement age (the age at which people can begin drawing their full Social Security benefits) for workers attaining age 62 in 2023 or later.
The GOP proposals don’t include any revenue increases to shore up the system. In fact, the proposal overshoots the current funding deficit with net benefit cutbacks of 122 percent of the current deficit in order to fund a tax decrease with a present value of 17.5 percent of the deficit.
By contrast, earlier this year, the Bipartisan Policy Center presented a package that would close the funding shortfall with a formula of 54 percent more revenue and 46 percent of adjusted benefits.
The suggested changes in the GOP proposal are in stark contrast to the last time Social Security was reformed in 1983, when lawmakers approved a package that increased Social Security taxes, changed the benefit formula, subjected a portion of Social Security benefits to federal income taxes and increased the retirement age. At that time, Republican President Ronald Reagan signed the law passed by a Democratic majority in the House and a Republican majority in the Senate.
A proposed increase in Social Security’s normal retirement age is often justified by the gains theU.S. has made in life expectancy over the past 50 years. However, emerging research notes that these gains have been accrued mostly by higher-income and higher-educated workers. Therefore, GOP proposals to increase the retirement age will hurt lower-income workers who aren’t living longer.
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On the campaign trail, Donald Trump promised not to cut Social Security benefits. The $12 trillion-dollar question: Will he keep his word and stand up to his fellow Republican lawmakers?
The GOP proposal contains 15 provisions. These are the most significant of those features:
- Raise the normal retirement age for workers attaining age 62 in 2023, gradually increasing it from the current age of 67 to age 69 for workers attaining age 62 in 2030.
- Change the formula for calculating benefits for retirees and disabled worker beneficiaries becoming newly eligible in 2023, phasing in changes over 10 years. The changes would slightly increase benefits for below-average earners and slightly decrease benefits for above-average earners, and would also favor workers who have paid into the system for 35 years. In addition, provide minimum benefits for workers who have paid into the system for more than 10 years.
- Beginning with the December 2018 COLA for current retirees, use the chained-weighted CPI to calculate COLAs and provide no COLA if the retiree’s modified adjusted gross income (MAGI) is above $85,000 for single tax filers and $170,000 for joint tax filers.
- Eliminate the earnings test beginning in January 2019. This test reduces benefits for beneficiaries who are younger than Social Security’s normal retirement age (currently age 66), are currently receiving Social Security benefit payments and have income from wages or self-employment that exceed $16,920 per year in 2017. Under current law, the earnings test no longer applies once a retiree attains the normal retirement age.
- Eliminate federal income taxation of Social Security retirement and disability benefits in 2054 and later, phased in from 2045 to 2053. Currently, single tax filers with combined “income” (adjusted gross income plus nontaxable interest income and one-half of their Social Security benefit) greater than $25,000 may pay income tax on up to 50 percent of their benefits. If combined income as defined above exceeds $34,000, up to 85 percent of the benefits may be taxable. These thresholds are $32,000 and $44,000 for joint tax filers.
- Provide an option for a worker to forgo a portion of the delayed retirement credit for postponing Social Security benefits beyond normal retirement age and instead receive a lump sum payment.
Further developments on this life-or-death issue for millions of working Americans are sure to happen before any changes become law.