Rep. Al Lawson (D-FL) recently proposed a piece of Social Security legislation, which has been reviewed by SSA’s Office of the Chief Actuary. Lawson’s proposal is the second major Social Security bill in a month. after Rep. John Larson’s (D-CT) Social Security 2100: A Sacred Trust.
As a reminder, the actuaries of social security foresee a program deficit of 3.54% of the taxable wage bill for the next 75 years. This deficit reflects the combination of rising costs and constant income levels (see Figure 1). The rising costs are the result of a slow-growing workforce and the retirement of baby boomers, raising the ratio of retirees to employees. The social security deficit can be eliminated by either increasing the income percentage and/or decreasing the cost percentage.
Read: Social Security proposal would boost revenue and temporarily improve benefits
Both the Lawson and Larson bills retain the current benefits – that is, they do not reduce costs. Instead, they raise the income rate by removing the cap on maximum taxable income. The area where the two bills differ most is in benefit improvements. While the Larson Act proposes a dozen improvements for a period of five years, the Lawson Act offers four improvements on a permanent basis.
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Specifically, the Lawson legislation proposes to:
Use the Consumer Price Index for Older People (CPI-E), which has historically risen faster than the CPI-W price index currently used for Social Security, to adjust benefits for inflation.
Extend the student allowance until the age of 23 if you are full-time students.
Increase the special minimum benefit for employees with very low wages and index it with the growth of average wages.
Establish an alternative benefit for surviving spouses equal to 75% of the couple’s benefit (with an upper limit).
To pay for these benefit improvements and, most importantly, to reduce the 75-year deficit, Lawson legislation would apply payroll taxes to income above $250,000 and to all income once the taxable maximum reaches $250,000. The legislation would apply a benefit factor of 2% to the average income above the current legal maximum.
Read: This hidden Social Security wrinkle can help you decide when to apply for benefits
Implementing these benefits and income provisions would roughly halve the long-term social security deficit, from 3.54% of taxable payroll to 1.88% (see Figure 2).
Both bills have some positive aspects: they keep current benefits and they bring in additional income, although the Larson bill at least seems limited in the revenue-boosting efforts of President Biden’s promise not to raise taxes on households living less than $ Earn 400,000.
In terms of benefit improvements, both “use” a lot of future earnings by switching from the CPI-W to the CPI-E for indexing benefits. Personally I wouldn’t worry about it. The other benefit changes in Lawson’s law are relatively small and positive. Most importantly, they are permanent and avoid the chaos likely to be created by the temporary improvements to the Larson Act.
But in the end, any solution is likely to involve a modest payroll tax hike rate, a change that would raise taxes for those under $400,000.