Social Security is in trouble -- not to the point where it's at risk of disappearing, but to the point where benefit cuts are a distinct possibility in a little over a decade's time.
In the coming years, Social Security is expected to owe more money in benefits than it collects in payroll tax revenue, its main source of funding. That's due to an anticipated mass exodus of older workers -- and a lagging number of incoming workers to replace them.
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Social Security can tap its trust funds to keep up with the benefits it owes for a period of time. But once its trust funds run dry, which is expected to happen in about a decade from now, benefit cuts may be inevitable.
President Biden, however, does not want to see those cuts happen. Biden has long voiced support for Social Security and has pledged to do what he can to strengthen the program to the best of his ability.
One solution he's introduced to this effect is to increase Social Security taxes on the wealthy. But just how well-received is that idea? Actually, you may be surprised.
There's strong bipartisan support, one survey says
Currently, workers only pay Social Security taxes on their first $168,600 of wages. What Biden wants to do is reintroduce Social Security taxes on incomes above $400,000. So conceivably, under this system, someone earning $450,000 would pay Social Security taxes on their first $168,600, and then pay taxes on an additional $50,000 of income.
Often, proposals of any nature that involve raising taxes tend to be met with pushback. But in a 2022 survey by the University of Maryland's School of Public Policy, roughly 80% of Republicans and nearly 90% of Democrats favored a plan to make all wages over $400,000 subject to Social Security taxes.
So in theory, Biden's proposal has potential. However, it also creates a bit of a problem.
Making higher earners whole
The fact that Social Security does not tax earnings above a certain threshold is said to work to the advantage of higher earners. But there's an important flipside to consider. Social Security also has a maximum monthly benefit it will pay retired workers based on the wage cap implemented each year.
To put it another way, this year, someone earning $450,000 will only pay Social Security taxes on their first $168,600 of income. But earnings above $168,600 also won't count toward calculating future Social Security benefits.
If Biden's plan goes through and Social Security taxes are reinstated once wages exceed $400,000, lawmakers will need to figure out how to make things equitable for those who are being forced to hand over that money. It wouldn't be fair to impose an additional tax on higher wages without the promise of a higher monthly Social Security benefit to follow suit.
But if the whole purpose of imposing Social Security taxes on higher earnings is to shore up the program and prevent benefit cuts, raising benefits for the wealthy may not achieve that. Of course, lawmakers could also take the "too bad for you" approach and do nothing to raise Social Security's maximum monthly benefit for those being taxed at a higher level. But that changes a core component of the way the program works and truly reads like a penalty on the wealthy.
Let's see what happens
All told, it's interesting to see that the concept of imposing Social Security taxes on higher incomes is well-received across both major party lines. But whether Biden's proposal can actually be made to work is a different story.
For this reason, it's a good idea for current and future retirees to prepare for Social Security cuts as best as they can. That could mean boosting retirement savings for those who are still working, or rethinking spending for those who are retired and stand to get hurt financially in the event of a smaller Social Security check.
