Why some Washington lawmakers want to tax high earners

Washington lawmakers have a new deadline to fix the Social Security retirement fund, based on a new annual report released this month by the program’s trustees.

In the fourth quarter of 2032, that trust fund – called Old-Age and Survivors Insurance, or OASI – could be depleted, when 78% of benefits will be paid, according to the latest estimates of the Trustees’ Social Security.

The new projections are several months further than previously thought for that fund, which Social Security relies on to pay monthly benefits to millions of retired workers, their spouses and children, and the survivors of deceased workers.

That has led to a renewed push to tax the wealthy to fund the program.

On Tuesday, Sens. Elizabeth Warren, D-Mass and Bernie Moreno, R-Ohio, co-authored an op-ed saying they are working with legislation to increase the payroll cap to help improve Social Security payments.

Currently, income up to $184,500 is subject to Social Security taxes. The highest earners do not pay in this program until the end of the year when they hit that snow. On March 9, people with $1 million in annual wages and salaries stop paying Social Security taxes in 2026, according to the Center for Economic and Policy Research.

At a meeting of the Senate finance committee on Wednesday on the future of Social Security, Sen. Bernie Sanders, Vt., said it’s time to “ask the richest people in this country, who have never had it so good, to start paying their share of taxes.”

Sanders has proposed a bill, the Social Security Expansion Act sponsored by Warren and nine other Senate Democrats, that would increase taxes on wages, salaries and self-employment income above $250,000 while providing an increase in certain benefits. The proposal also calls for raising the tax on net investment income while active trade or business capital is subject to those taxes.

Another bill proposed by Rep. John Larson, D-Conn., Social Security Act 2100, would make incomes above $400,000 subject to Social Security payroll taxes while also providing a benefit increase. That proposal, set for 2023, was not renewed this session of Congress. It had 189 Democratic co-sponsors.

Moreno’s endorsement is a “major achievement” among Democratic leaders’ efforts to build a coalition to address the issue, Larson said in a statement.

The rate of income tax for salaried employees is adjusted every year to keep pace with national income growth. As a result, the gap between that wage base and any threshold at which payroll taxes are recapped — whether it’s $250,000 or $400,000 — will eventually close over time.

The Social Security reform enacted in 1983, when funding for the program was reduced, was intended to provide solvency for 75 years, which would bring the program to 2058.

Yet at that time the horizon was shortened, mainly due to rising income inequality and the impact of the Great Recession, according to Stephen Nuñez, director of stratification economics at the Roosevelt Institute, a left-leaning think tank.

In 1983, the Social Security tax was enough to cover 90% of the eligible income, Nuñez said, and the reforms are thought to continue going forward.

But in 2000, FICA taxes accounted for about 82.5% of taxable income and have remained at that level, he said.

“That was a big, big drop in revenue that was expected when the system was meant to be the last resort,” Nuñez said.

How much an increase in the payroll tax cap might expand the Social Security debt today depends on certain changes, including whether they would be paired with a benefit increase.

Social Security was created to provide basic economic security when wages are lost due to old age, disability or death, Nancy Altman, president of Social Security Works, an advocacy organization focused on increasing benefits, told a Senate subcommittee hearing Wednesday.

The first question to address in reform is, “What level of benefits should Social Security provide?” Altman said.

Today’s benefits are “low by almost any measure,” he said. Cutting benefits will hurt retirees who are already struggling financially, as well as the economy, Altman said.

But if those tax increases are imposed on small businesses, whose profits are included on the owners’ personal tax returns, that could hurt their ability to invest in growth and job creation, Elizabeth Milito, vice president and executive director of the National Federation of Independent Business Small Business Legal Center, said at a Senate subcommittee hearing.

In response, Sanders said his bill would exempt “most” small businesses from paying additional taxes because they would fall below the $250,000 threshold.

However, it remains to be seen whether lawmakers on both sides of the aisle will agree to pass a tax increase package.

“The current amount of Social Security’s unfunded liabilities is $30 trillion,” said Sen. Chuck Grassley, R-Iowa, chairman of the Senate Finance subcommittee on Social Security, pensions and family policy, during a hearing Wednesday.

“This fiscal hole cannot be closed by raising taxes on the rich, which is the Democrats’ favorite solution, or by cutting waste, fraud and abuse, which is the Republicans’ favorite solution,” Grassley said.

Any new changes to Social Security must be bipartisan, Shai Akabas, vice president of economic policy at the Bipartisan Policy Center, said during a Senate subcommittee hearing Wednesday. Senate rules require 60 votes to pass Social Security reform, and “no party is likely to get there alone,” he said.

The Bipartisan Policy Center, a bipartisan think tank, agrees that raising the maximum tax rate on Social Security should be considered part of comprehensive reform, Akabas said.

But there is limited capacity to raise taxes to address all the issues that need to be addressed, including closing the growing deficit, he said.

“We think a balance that includes both more money in the system and adjustments to benefits is needed,” Akabas said.