There are a variety of reasons to closely watch the new debate over Social Security benefits and FICA taxes, which has become part of the negotiations over raising the U.S. Federal debt ceiling.
Some Senatorial candidates ran on a promise to cut Social Security, Medicare and/or prescription drug reforms that lower drug costs for seniors. And the Republican Study Committee released a proposed budget that would raise the age to receive full Social Security benefits to age 70, with the age going up based on changes to life expectancy thereafter. Medicare benefits would, under the plan, become a means-tested voucher program.
On the other side of the political divide, a number of prominent Democrats have proposed that the government shore up the Social Security program by eliminating the wage cap on FICA taxes. That means that instead of applying a 15.3% tax on wage earnings up to $160,000, the tax would be applied to all wage earnings. The argument there is that it is unfair that a handful of executives effectively pay their entire year’s FICA taxes in the first hour of their first workday in the new year, effectively paying hundredths of a percent of their income into the system, while the majority of people are paying 15.3% of their income.
It is unlikely, from a political standpoint, that Congress will take away Social Security benefits from the people who are already receiving them—because that would create a backlash among older voters. The people who have become most wary of such proposals are younger workers, who have grown up skeptical that their parents’ generation ever intended for them to enjoy the lifetime retirement annuity that they created for themselves. Cuts to Medicare might be easier to hide from voters but would run afoul of the medical lobby.
A compromise might be a gradual increase in full retirement age over time, tied to increases in lifespans. After all, when the Social Security program was enacted, the normal retirement age (65) roughly equaled the average American’s lifespan; things have changed a lot since then.
Most economists are equally skeptical about eliminating the wage cap, for a number of reasons. One is that it wouldn’t be imposed on investment gains and income, which is a significant source of wealth for the wealthiest Americans. Second, it would be relatively easy to avoid the tax; business owners and corporate executives could find ways to recharacterize their compensation as dividends or other distributions that are not wages.
But at the same time, some see the current cap as somewhat arbitrary, and raising it incrementally might not be too onerous on working Americans, or politically dangerous.
Another possible ‘fix’ to Social Security is to raise the number of workers who pay into the system. Currently, 16.9% of Americans are over age 65, and that percentage is expected to grow to 22% by 2050. The ratio of workers to retirees (people paying into people receiving) could be improved due to an influx younger immigrant workers. But of course, that too carries with it a number of delicate political implications.
This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.