Much of the discussion about tax reform on Capitol Hill has focused on lowering corporate tax rates, and the taxes paid by the highest-income households. The GOP’s “Better Way” tax plan released in 2016 would affect everyone, including older Americans, because it reduces the seven income tax brackets, ranging from 10% - 39.6% to just three — 12%, 25%, and 33% while substantially raising the amount of personal exemptions.
There appears to be bipartisan support, for example, to adjust or even eliminate current tax provisions that subject a portion of Social Security benefits to taxation for taxpayers with incomes over $25,000 (individual) and joint filers with incomes above $32,000. Such a change is needed with an average of about 56% of older households paying taxes on their Social Security benefits every year. But because the revenues from taxation of Social Security benefits are currently going to fund the benefits of current Social Security and Medicare recipients, a replacement for the revenues would be needed.
One area of tax reform that has broad support among older Americans is raising Social Security’s payroll taxes as the means for extending Social Security’s solvency. Fifty-eight percent of TSCL’s 2017 Senior Survey participants support very gradually increasing the payroll tax rate by 1% each for workers and their employers, increasing the current rate from 6.2% each to 7.2% each. Only 13% are opposed.
An even bigger majority — 73% — support making the highest-earning workers pay their fair share by applying the full 12.4% payroll tax to ALL earnings above the maximum taxable limit, $127,200 in 2017. Few, however, support tax reform that would continue to allow a tax break on earnings for higher income workers.
Only 36% said they supported raising the taxable maximum cap to apply the full 12.4% payroll tax to all earnings above $250,000, leaving workers with wages of more than $127,200 and less than $250,000 paying no Social Security taxes on wages between those amounts. Thirty-five percent were opposed to the idea, with 29% unsure about what they thought. TSCL Advisor editor Mary Johnson estimates that under this scheme “Every Member of Congress, would pocket a $2,900 tax break on $49,800 of their $174,000 incomes — the amount that would be in excess of Social Security’s current $127,200 taxable maximum.”
While the trust fund that pays Social Security retirement and survivors benefits isn’t forecast to become insolvent until 2035, the disability insurance trust fund is projected to be depleted just six years from now — in 2023 — according to the Social Security Trustees. TSCL believes that, done right, tax reform could offer Congress a bipartisan opportunity; not only to provide tax cuts for older households, but one that could provide a modest boost in benefits, pay a more fair and adequate COLA, and extend Social Security solvency for decades to come.
To learn more, read “Legislation To Boost Benefits, Improve Social Security Solvency, Introduced"