AARP Latest 2023 Already Graded A

AARP Latest 2023 Already Graded A Increase Payroll Tax Cap The Social Security payroll tax currently applies to annual earnings up to $118,500. Any wages earned above $118,500 go untaxed for Social Security. This cap generally increases every year as the national average wage increases. Today, the cap covers about 84 percent of total earnings in the nation. Raising the cap to cover a higher percent of total earnings would help close Social Security's funding gap. This would mean any employee earning more than the current tax cap of $118,500 (as well as his or her employer) would have to pay more payroll taxes. Increase Payroll Tax Cap (Pro) 1. Make Social Security financing more fair by requiring top earners to pay somewhat more into Social Security 2. Eliminate more than a third (36 percent) of Social Security's projected financing gap over the long term. Increase Payroll Tax Cap (Against) 1. Cause a hefty tax increase that will hit middle-income taxpayers while not affecting the rich. It would especially hurt the self- employed and certain smaller business owners. 2. In general, increasing taxes is a bad idea. For one thing, it reduces the amount that Americans have to spend on their own and their family's food, housing clothes, education, and so on. Additional taxes that seem like a trivial amount to people in Washington may cause real problems to normal Americans. Eliminate Payroll Tax Cap The Social Security payroll tax currently applies to annual earnings up to $118,500. Any wages earned above $118,500 go untaxed for Social Security. This cap generally increases every year with increases in the national average wage. Today, the cap covers about 84 percent of total earnings. Eliminating the cap so that all earnings would be subject to Social Security's payroll tax would help close the program's funding gap. If your income is under $118,500, you would see no change. If you make above that amount, you (as well as your employer) would pay the 6.2 percent payroll tax on your remaining wages. Eliminate Payroll Tax Cap (Pro) 1. Eliminating the cap on earnings subject to Social Security taxes would call on top earners to contribute more toward the basic economic security of the nation's elderly and families, commensurate with top earners' ability to pay. 2. Equalize the duration of Social Security taxes throughout the year, so that the top 6 percent of earners would pay into Social Security all year long, just as the other 94 percent of workers do. Eliminate Payroll Tax Cap (Against) 1. Today, a retiree's benefits are based only on the income on which he or she pays Social Security payroll taxes. Because of this, the maximum Social Security benefit that even the wealthiest American can receive is just over $30,000 a year. If millionaires pay Social Security taxes on all of their salary income, the maximum annual benefit payment could reach over $150,000 a year. This development would not bankrupt the program, but it would change its nature. Social Security was not intended to provide such large benefits. 2. It breaks the link between earnings and benefits. So far, a retiree's Social Security benefits have always been based on the career earnings on which he or she has paid Social Security taxes. Dropping that principle would open the door to other substantial changes in Social Security. Increase Payroll Tax Rate Employers and employees each currently pay a 6.2 percent tax to Social Security on earnings up to $118,500. Self-employed workers pay both the employer and employee share, for a total of 12.4 percent. One option to help close the Social Security funding gap would be to raise the payroll tax rate for all workers and employers. For instance, on a $50,000 annual salary, increasing the payroll tax rate to 6.45 percent would increase both the annual employee and employer contribution by $125 each. Changing it to 7.2 percent would increase the annual employee and employer contribution by $500 each. The rate increase could occur gradually or all at once. Increasing the payroll tax rate from 6.2 percent to 6.45 percent immediately is estimated to fill 22 percent of the funding gap. Increasing the payroll tax rate gradually over 20 years from 6.2 percent to 7.2 percent is estimated to fill 64 percent of the funding gap. Increase Payroll Tax Rate (Pro) 1. Social Security does not need additional income now, but almost certainly will within the next 25 years. Policymakers should act soon to schedule an increase in the payroll tax rate to take effect in the future when more money will be needed. 2. Policymakers could act now to schedule a gradual rate increase. A gradual increase of 1/20th of 1 percent each year for 20 years, from 2017 through 2036, would eliminate nearly two- thirds of the program's projected 75-year shortfall. For an average worker, the additional payment would amount to about 50 cents more a week each year— "barely the cost of a pack of chewing gum," as one advocate of this policy has noted. Increase Payroll Tax Rate (Against) 1. It would increase taxes for everyone, no matter what their income. Higher payroll taxes would cause increased unemployment. 2. Added uncertainty that such a move would cause. Payroll tax rates have remained the same since 1990. Once they start to change, employers will fear that additional increases will follow and factor this worry into their hiring decisions. Raise Full Retirement Age The age when a person becomes eligible to receive full, unreduced Social Security retirement benefits (the full retirement age), has been increasing from age 65 on a schedule set by Congress in 1983. It has reached 66 and will gradually rise to 67 for those born in 1960 and later. Raising the full retirement age further is one option to help close Social Security's funding gap. One proposal would raise the full retirement age to 68. Starting in 2023, the age would increase by two months each year until it reached 68 in 2028 Raise Full Retirement Age (Pro) 1. Social Security's full retirement age should increase for the simple reason that people are living longer. 2. Many who wish to work longer may have health issues or disabilities that make it impossible to delay retirement. Workers with physically demanding jobs are most likely to face these issues. They should not be penalized by higher age requirements. Instead, they should receive benefits through Social Security's disability insurance program until they reach the new retirement ages. Raise Full Retirement Age (Against) 1. Cutting benefits by raising the retirement age would place undue hardship on today's young workers. This steady erosion of Social Security benefits would seriously undermine the retirement prospects of today's young workers. Policymakers can do better. Social Security's projected financing shortfall is manageable. In national surveys, Americans report that they value Social Security and are willing to pay for it to keep it strong. 2. Social Security already provides new incentives for people to work longer if they can. If Congress wants to encourage later retirement, it could increase public education about the advantages of waiting to start collecting benefits. Increase Years to Calculate Benefits Social Security retirement benefits are based on a worker's average earnings history. Average earnings are computed from a worker's highest 35 years of annual indexed earnings that were subject to Social Security payroll taxes. If a worker has fewer than 35 years of earnings, each year needed to reach 35 is assigned zero earnings. Increase Years to Calculate Benefits (Pro) 1. Under the current method, an individual who goes to work full time at age 21 has worked and paid Social Security taxes for 45 years by the time that he or she reaches Social Security's current full benefit age of 66. Meanwhile, people could wait until age 30 before going to work and still receive full credit toward their eventual retirement benefits, allowing them to pay fewer years of Social Security payroll taxes than someone who works longer, but get the same benefits. 2. Increasing the number of years used to calculate an individual's Social Security benefit would provide an added incentive for him or her to go into the workforce sooner and to keep working. Increase Years to Calculate Benefits (Against) 1. It would reduce benefits the most for retirees who need them the most: women, low wage earners, and minorities. 2. The largest reductions would affect people with gaps in their covered work histories, typically women. Women are more likely than men to drop out of the workforce to raise children or care for other family members. The average monthly benefit for retired women ($1,073) is 78 percent of the average benefit for men ($1,383); this proposal would increase that gender gap. Reduce Benefits for Higher Earners While higher lifetime earners receive higher payments than lower lifetime earners, their benefits replace a smaller share of their past earnings than do the benefits provided to lower earners. One option to help close Social Security's funding gap would be to reduce benefits for higher lifetime earners. This could be done by modifying Social Security's benefit formula in a number of ways, depending on who is classified as higher earners and how much their benefits are reduced. Most options use a sliding scale to reduce benefits most for higher earners, make smaller changes for middle earners and make no benefit changes for lower earners. Reduce Benefits for Higher Earners (Pro) 1. In the future, we face an era when Social Security has promised future retirees more in benefits than it will be able to pay once the Social Security trust fund runs out of money. It seems only fair to protect the benefits of those who have lower wages by reducing the benefits of those who have higher earnings. Everyone would still receive a benefit, but higher-earning retirees would receive less than they do now. 2. Upper-income workers tend to have better opportunities to save for retirement than those with lower incomes. They are more likely to work at a company that offers them either traditional pension or a retirement savings plan. They are also much more likely to have extra income to put away for retirement, while lower-income workers are likely to need a higher proportion of their income for day-to-day expenses during their working years. Reduce Benefits for Higher Earners (Against) 1. Proposals to cut benefits for higher earners are often billed as benefit reductions for the wealthy—but they would actually cut benefits for the broad middle class. These proposals do not consider the total incomes or wealth (such as financial assets, real estate, and so forth) of the individuals whose benefits would be cut. Because taxable earnings are capped annually (at $118,500 in 2015), the formula does not distinguish between someone making $118,500 a year or someone making $1,000,000 a year. Using the Social Security benefit formula to cut benefits does not target the rich; it hits middle-class workers making $118,500 or less. 2. Other elements of a secure retirement—a home with a paid-off mortgage, a steady pension check, and solid savings—are much less secure than once thought. Social Security's guaranteed benefits are more important than ever. Cutting benefits is unnecessary, and doing so would be a breach of trust with millions of Americans who have been paying into the program and earning their modest benefits Begin Means-Testing Social Security Benefits Means testing would reduce benefits for higher-income recipients and could even eliminate benefits altogether for the highest-income households. Unlike the reform option to reduce benefits for higher earners, which uses a measure of career average earnings to reduce benefits, means testing would reduce benefits based on the full range of current income. Who would be affected and by how much depends on how the income thresholds are defined. One proposal for means testing is estimated to fill about 11 percent of the funding gap. Begin Means-Testing Social Security Benefits (Pro) 1. In an era of scarce resources, Social Security cannot afford to continue to pay benefits to every eligible retiree regardless of what other retirement income they have. One approach to preserving the program would be to provide monthly benefits only to retirees who have less than a certain amount of non-Social Security annual income. Those with more income would be guaranteed that if their circumstances change, they would start to receive their benefits. 2. There are many ways to apply a means test, but all of them preserve scare benefit dollars by paying them to those who really need the income. And all taxpayers, no matter what their income level, receive the guarantee that Social Security will be there for them if needed. Begin Means-Testing Social Security Benefits (Against) 1. Means testing Social Security would fundamentally change it from social insurance (a universal system of benefits earned by all who have paid in) to public assistance (a system requiring you to prove you are needy in order to qualify for benefits). Currently, benefits are an earned right based as payroll taxes. Social Security uses an earnings replacement concept, recognizing that there is a relationship between your standard of living while working and the benefit you need in order to achieve income security in retirement. The benefit formula already replaces a higher portion of past earnings for low earners than for higher earners. 2. A means test is a penalty on thrift. It creates a huge disincentive for people to save, buy other insurance, or work part-time in retirement; or for employers to provide pensions to their workers. With a means test, anything else you have reduces your benefit amount.