Will benefits really fall in 2034? As the projected year of the OASDI Trust Fund exhaustion draws nearer, interest is growing in how this math problem will be solved. For clues to how or when Congress will act, we turn to several recent news items. One is testimony by SSA chief actuary Steven Goss to the Senate Budget Committee. Another is a bill by Sheldon Whitehouse and Brendan Boyle called the “Medicare and Social Security Fair Share Act.” And a third is a revision to John Larson’s “Social Security 2100 Act,” which extends the sunset date of its provisions to 2034 from 2027, extending solvency to 2066.
Steve Goss’ testimony revealed a couple of important points. One is that there is an assumption in Congress that if the Trust Fund is allowed to exhaust, the federal government will pick up the shortfall by paying promised benefits out of general revenues. So although we will continue to tell clients that we expect Congress to act in time to forestall a cut in benefits, I think we can all breathe a bit easier knowing that the federal government is prepared to pick up the tab for benefits not covered by ongoing payroll tax revenues. To avert this from happening, legislation is likely. No one wants the federal government paying Social Security benefits out of general revenues on a permanent basis. The system’s finances need to be fixed.
And that’s where the legislation comes in. John Larson’s Social Security 2100 Act contains a number of provisions that would help or hurt different groups of people. Caregivers, grandparents, children of retired or deceased workers, and workers subject to the WEP or GPO would be helped. (See the full provisions here.) High earners would be hurt. The Whitehouse/Boyle bill has just two provision, both of them taxing high earners.
Both bills would apply the Social Security payroll tax to earnings over $400,000 starting in 2025. As the maximum taxable wage base increases with inflation, eventually all earnings would be subject to Social Security payroll taxes. In addition, both bills would apply a tax on net investment income as defined in the Affordable Care Act, also starting in 2025. Here’s how this provision is worded in each respective bill:
Larson: Apply a separate 12.4-percent tax on net investment income (NII), as defined in the Affordable Care Act (ACA), payable to the OASI and DI Trust Funds with an unindexed threshold of $400,000, effective 2025 and later. The NII tax would apply to the lesser of NII and the excess of modified adjusted gross income (MAGI) above the unindexed threshold of $400,000. This single threshold would apply regardless of tax filing status.
Whitehouse/Boyle: Expand the tax on net investment income (NII) as defined in the Affordable Care Act (ACA) to cover earnings from active S corporation holders and active limited partners. Apply a 12.4-percent tax on this expanded definition of NII, payable to the OASI and DI Trust Funds with specified thresholds, effective for 2024 and later. The NII tax would apply to the lesser of NII and the excess of modified adjusted gross income (MAGI) above the unindexed thresholds of $400,000 for a single filer and $500,000 for a married couple filing jointly.
We must remember that these bills have not passed yet. They are just proposed legislation. But we bring them to you so you can be informed when talking to clients about the future of Social Security financing. Most will be relieved to know that Congress is at least thinking about this and that the solutions will probably not cost them anything. Your high-earning clients, on the other hand, may start asking you about tax-planning and income-shifting strategies.