Legislative Update: July 2017

Legislative Update: July 2017

Tax Reform Proposal Would Get Rid Of Social Security’s Source Of Funding

By Jessie Gibbons, Senior Policy Analyst

For the first time in over thirty years, comprehensive tax reform is at the top of the congressional agenda.  Negotiations on Capitol Hill have been evolving for months, and The Senior Citizens League (TSCL) is monitoring them closely, since the Social Security program – which is funded primarily by payroll taxes – will undoubtedly be affected.

In April, lawmakers proposed a highly controversial change to Social Security: to completely eliminate the 12.4% payroll tax that currently funds benefits.  If implemented, Congress would need to find another way to finance the Social Security benefits of all current beneficiaries.

Older Americans and advocates like TSCL have spoken out against this radical proposal for three major reasons.  First, Social Security benefits would no longer be considered “earned” since individuals would not be paying into the program throughout their careers.  If Congress eliminated the payroll tax, Social Security would become more like welfare for seniors, instead of current social insurance coverage.

Second, Social Security would lose its protected “off budget” status since it would be funded by general revenues.  It would be subjected to the annual appropriations process, back - door budget deals, and severe funding cuts.

And third, if the payroll tax were eliminated, benefits would not likely be calculated based on lifetime earnings as they are now. Some proposals would make benefits a flat amount, leading to large cuts for almost everyone.  These drastic changes to the program would end Social Security as we now know it.

Instead of eliminating the Social Security payroll tax, TSCL is advocating on Capitol Hill for the following three policies that would strengthen the program and provide financial relief to beneficiaries:

  1. Increase the Social Security payroll tax rate. Social Security is currently financed by a 12.4% payroll tax, split evenly between employers and their employees.  Increasing the rate very gradually to 14.4% – just 1% more for both workers and employers – would extend the lifespan of the Social Security program for decades to come and would amount to just an extra 50 cents per week for the average worker.  In a recent survey of TSCL’s members and supporters, nearly 60% expressed their strong support for the modest payroll tax increase.
  1. Increase the amount of wages subject to Social Security taxes. Under current law, the Social Security payroll tax is applied only to the first $127,200 in annual income.  People who earn more than that pay zero Social Security taxes on the rest of their earnings.  Several proposals now before Congress would modify this policy so that millionaires and billionaires pay on all wages the same as everyone else. According to recent survey results, TSCL’s members and supporters overwhelmingly support an increase in the cap.  In January, 73% of respondents said the payroll tax should be applied to all income over $127,200.
  1. Eliminate income taxes on Social Security benefits. Millions of middle-income Social Security recipients currently pay income taxes on a portion of their benefits due to legislation that was signed into law in the early 1980s.  The income threshold for taxation – set at $25,000 for individual filers and $32,000 for joint filers – hasn’t been adjusted since then.  According to recent survey results, 56% of older households on average pay taxes on their benefits, and that number is projected to rise in coming years.  Adjusting the income threshold for taxation or repealing the tax on Social Security benefits altogether would provide millions of middle-income older Americans with much-needed financial relief in retirement.

In the weeks and months ahead, TSCL will keep a close eye on the tax reform negotiations, and we will continue to advocate for the policy priorities of our members and supporters.  For the latest news on the tax reform debate, follow TSCL on Twitter or visit the Legislative News section of our website.