Johnson's Social Security Reform Act of 2016 (H.R. 6489) includes cuts Republicans have been impatient to enact for decades. Johnson bill violates candidate Donald Trump's firm promise to protect the program. But members of President Trump's new administration are not only on board with the Republican plan to cut Social Security benefit checks, they strongly favor privatizing Social Security.
Johnson has led Republicans on the Social Security subcommittee for a decade, so it’s not surprising that the bill is made up of a lot of ideas they have supported in the past. Johnson's Reform Act proposes 15 changes. Of those, 10 have impacts under 0.10 percent of funding. Many are considered "negligible." The big cuts come in three provisions of Johnson's bill:
- Raise the retirement age from 67 to 69 for Americans who are currently 49 or younger
- Change the Primary Insurance Amount (PIA) benefit formula that determines the size of a retiree’s initial payments
- Change the method for calculating inflation so the program's cost of living adjustments rise according to chained CPI, a far less generous metric than the current law’s inflation index.
According to estimations from the Social Security Administration’s chief actuary, people who make more than $22,000 annually over the course of their lifetimes would see their benefits slashed. About half of lowest wage earner Americans would see a near term rise in the benefits they initially receive, while the middle income half’s would fall significantly under Johnson’s plan. But almost everybody would see cuts eventually due to the reduced cost of living adjustments.
Under Johnson’s plan, a middle-class 65-year-old claiming benefits in 2030 ― one with average annual earnings of about $49,000 over 30 years of covered employment ― would experience a 17 percent benefit cut relative to what the program currently promises them, according to the Social Security Administration’s chief actuary. A 65-year-old with the same earnings history claiming benefits in 2050 would experience a 28 percent benefit cut compared to current law. Benefit cuts increase each year after 2030. A 33-year-old medium-wage worker today would experience a benefit cut of 33.2 percent when retiring in 2050. That cut would increase to 34.1 percent by the time they reached 95.
Johnson has announced he will retire at the end of his current term of office. After serving in Congress for 28 years, not only can Johnson draw a big Social Security check, but he can also receive more than $70,000 a year from his congressional pension.Drastically cutting the benefits of those in the middle and higher earning scales stands to destabilize the broad political support that has typically protected Social Security in the past, which Republicans view as their bonus prize to eventually privatize Social Security into individual savings and investment accounts.
Republicans have been saying Social Security has been going bust, for years. The issue is that if nothing is done to boost revenue, as baby boomers reach retirement age over the next dozen years, the Social Security Board of Trustees has forecast the program will exhaust its more than $2.8 trillion in surplus cash by the year 2034. Should this happen, across-the-board benefit cuts of up to 21 percent may be needed to sustain payouts through 2090.
The conservative solution is to enact a laundry list of wholesale cuts to Social Security benefits. Progressive Democrats advocate for a much easier fix - simply raise or eliminate the contribution tax income cap. Raise or eliminating the cap at the same extends Social Security solvency to the end of this century and allows for benefit expansion - meaning seniors will have a little more money to help cover their healthcare costs.
But instead of just raising or eliminating the income limit on the Social Security contribution tax -- again, a relatively easy thing to do -- Sam Johnson's GOP approach to "saving" Social Security is to carve it up, cut benefits and privatize it. That's not a viable solution for the millions of Americans.
Johnson stated in a press release that the bill "will permanently save Social Security, ensuring this vital program continues to work for today’s workers and beneficiaries and future generations." But the cuts to future benefits mandated by Johnson's bill are not mentioned in the news release. Nor are they mentioned in a supporting document from Johnson's office.
If implemented, here's how Johnson's GOP cuts to Social Security would actually work, according to the Center for American Progress, a progressive think tank:
- Workers making around $50,000 would see checks shrink by between 11% and 35%.
- The first year for receiving full benefits would climb to 67.
- Nearly every income bracket would see a reduction, save for the very bottom.
"Instead of honoring the promises made to our seniors," says Rep. Richard Neal, a ranking Democrat on Ways and Means, "the Republican plan would amount to a massive cut in Social Security benefits for working Americans through cuts to the cost-of-living adjustment (COLA), raising the retirement age to 69 and cuts to the benefit-computation formula. Ultimately, this translates to a 30% or more cut in benefits for middle class retirees."
Ironically, for a bill that claims to preserve Social Security's solvency, Johnson's plan yields an actual reduction to revenues into the program in the form a tax cut for beneficiaries at the top of the earning scale. High-earners already benefit from a cap on the payroll taxes they pay into the system before the claim benefits, and under Johnson's plan, they would see the taxes they pay on Social Security benefits phased out.
There's a better way of funding Social Security, which will begin to trim payments in 2034 if nothing is done. Simply raise the earnings cap subject to Social Security taxes, which is set artificially low at $118,500 for 2016 and $127,200 starting in 2017. Democrats from Barack Obama to Bernie Sanders have proposed applying the payroll tax to incomes above $250,000, thus carving out a politically palatable “hole” between $127,200 and 250,000 so that “middle-class” earners are able avoid the additional tax burden.
Social Security payroll tax differs from federal income tax. Income taxes are levied on practically all income (that isn't stashed away in offshore tax havens) with higher income earners paying higher rates. Everyone pays into the Social Security fund at the same 6.2 percent rate. (The self-employed, who must pay the employee and employer contributions, pay 12.4 percent.)
Old age, survivor and disability insurance (OASDI) – as the Social Security portion of payroll taxes is known – is only paid on the first $127,200 in earnings. For the approximately 161 million workers earning less than that cap every year, raising the payroll cap higher than the current $127,200, or eliminating the cap altogether, is not an issue - until they retire and need a fully funded and functioning Social Security system.
The earnings cap increase from $18,500 to $127,200 starting in 2017 is larger than in the past partly because the Republicans in Congress have refused to allow cost-of-living adjustment increases to retirees receiving benefit payment. Program rules prohibit raising the maximum taxable earnings level without also providing a cost-of-living adjustment (this year's adjustment is 0.3%). The maximum taxable earnings level is tied to the National Average Wage Index, which rose 3.6% in 2014 – without a corresponding rise in the earnings cutoff – and 3.5% in 2015. The result is the largest bump to the earnings cap since 1981.
The rise in income inequality has not been kind to the Social Security program that only taxes a limited chunk of income. The percentage of workers who make more than the cutoff has not changed significantly – it is currently around 6% – but the proportion of the nation's income that is subject to OASDI taxes has fallen from 90.0% in 1983 to 82.7% in 2014, as a greater share of the nation's income goes to that cohort. The over $2 trillion dollars of earnings that escape Social Security tax are a result of the lopsided growth of income for the lucky few (about 9.6 million) earning over $127,000 or so per year.
The top 9,600 Americans who earn over $10 million per year hit their $27,200 contribution cap for 2017 by the time they went home from work on Friday, January 13, 2017. When they went back to work on January 16th, they were finished contributing to the Social Security fund for the rest of the year.
Kathleen Romig at the Center for Budget and Policy Priorities argues that eliminating the cap would make up for the unanticipated growth in income inequality caused by the rapid increase in earnings above the cap and stagnation of earnings for the bottom 94 percent in the 1990s and 2000. Karen Smith at the Urban Institute lists raising the cap as a means to ensure Social Security’s financial strength. Because raising the cap would mean only a few of the highest earners pay more, it is unlikely to inhibit overall economic activity. The richest people in America would not lose their place or social status or economic well-being. The largest effect would be that the retirement system for the bottom 99 percent of workers would be solvent until 2087.
We could also collect revenue for Social Security from income that is currently not counted as labor income. The richest 20 Americans - including 4 Mars candy family members and 3 Waltons - likely earn at least 6 percent per year in dividend, interest, and capital gains on their wealth, or $45 billion. The lowest 21 million earners also earned $45 billion. The top 20 earned $22 billion per year each on average and paid no Social Security tax. The bottom 21 million earned $2,000 per year each on average and paid 6.4 percent of Social Security tax. Because income from wealth is not considered wages, Social Security taxes are not paid. However, if these billionaires paid Social Security tax, the Social Security system would instantly have 10 percent more revenue.
The good news is that there’s still little to no appetite among the electorate for doing any sort of damage to the well-liked program. As of last summer, a majority of those surveyed by Gallup favored raising taxes to shore up the program, compared to just 37 percent polled who favored benefit cuts. The Republicans took a political lashing in 2005 when president George W. Bush tried to privatize Social Security. Johnson’s plan to “save” Social Security by wrecking it is a sign that Republicans in Congress might be gearing up for more overreach.
Pew Research: 5 facts about Social Security