New Bill Won’t Save Social Security

Payroll Tax Expansion

The bill proposes an expansion of the payroll tax to eliminate the income limit (currently $142,800) while also conforming to the Biden administration promise not to increase taxes of workers earning less than $400,000. 

Workers earning more than $400,000 will be subject to an additional 12.4% tax (6.2% paid by the employer). The gap between the existing threshold and the $400,000 limit creates a Social Security “donut hole” that would sharply increase marginal tax rates for higher earners.

What the Policy Wonks Say

Andrew G. Biggs, a senior fellow at the American Enterprise Institute and a former principal deputy commissioner of the Social Security Administration, sees the bill as an opening salvo in the inevitable political clash over how to address funding Social Security to avoid a significant drop in benefits in 2034.

He sees the proposed changes as a mix of relatively inexpensive improvements with largely bipartisan support with a benefit increase that lasts only five years and a funding increase that only delays benefit cuts by four years to 2038.

“The proposal has been around since 2014,” he says. “The original version of it fixed Social Security finances for 75 years. They don’t have enough tax revenues to fix the system. The cost of the new benefits is so high that he only includes it for a few years and then assumes the benefits go away. It’s an increasingly implausible approach to addressing the funding gap.”

Because the Social Security income threshold is adjusted each year for inflation, the donut hole between the original and the new $400,000 income payroll tax threshold will shrink over time. Raising payroll taxes from higher-income workers won’t raise enough revenue to keep Social Security solvent beyond 2038. While 12 of the 13 provisions only last for five years, the tax increase is permanent.

Jason Fichtner, chief economist at the Bipartisan Policy Center and former deputy commissioner at the Social Security Administration, agrees that the proposal doesn’t fix the program’s long-term funding problems.

“Proposals to improve Social Security should first focus on paying for the benefits currently promised, before proposing expanding benefits,” he says. “Congress needs to focus on making the program solvent for the long term.”