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The changing dynamics of American society have put Social Security, once the cornerstone of American retirement, in jeopardy. Americans now live much longer than they did in the 1930s, meaning there are more retirees in need of benefits. The proportion between retirees and active workers funding the program with tax revenues is out of balance. According to the Social Security Trustees, this means that the Social Security Trust Fund may run dry as soon as 2034, at which point benefits will have to be cut by about 20%.
That is, unless Congress enacts some type of bill. While various ideas have been kicked around for years, not much actual legislation has been proposed. But in late Jan. 2024, the You Earned It, You Keep It Act was proposed in the House. Here are the most important provisions of the bill, along with a look at how it might save Social Security from running out.
The You Earned It, You Keep It Act
Rep. Angie Craig from Minnesota introduced the You Earned It, You Keep It Act to the House of Representatives on Jan. 25, 2024. The bill has two main provisions. The first is to eliminate all federal taxes on Social Security benefits by 2025. The second is a bit more complicated but involves changing the Social Security tax cap.
Currently, income subject to Social Security taxes is capped at $168,000. But the You Earned It, You Keep It Act would tax individuals earning more than $250,000 per year as well. This means that wealthier individuals who currently only pay Social Security taxes on a portion of their income would have to kick in more money.
Who Would This Act Benefit Most?
According to Social Security’s Office of the Actuary, the You Earned It, You Keep It Act would extend the solvency of the Social Security trust fund by 20 full years. In that sense, the act would benefit all Social Security recipients, as all beneficiaries would avoid the potential 20% across-the-board cut in benefits that’s slated to hit in 2034.
Similarly, the elimination of taxation on Social Security benefits would also apply to all recipients. As Rep. Craig put it, it would amount to “a tax cut for seniors and a way to ensure more Americans can depend on the Social Security benefits they’ve earned.”
In another sense, the act would be of particular benefit to higher-earning beneficiaries. Those who earn under $25,000 per year already don’t have to pay taxes on their benefits, but that would now apply to those with unlimited earnings. This could amount to a significant tax break for higher-income beneficiaries, many of which currently pay tax on as much as 85% of their Social Security income.
However, higher-income individuals are also the ones who would be required to pay more taxes on their income during their working careers, so the benefit likely cancels itself out.
What Do Experts Say About the Act?
While generally being in favor of some type of Social Security modification bill, PGIM DC Solutions’ David Blanchett says it is a “little bit disingenuous” to call the You Earned It You Keep It Act a “win-win.”
As he puts it, “I’d probably like the bill more if this particular provision [to eliminate taxation of benefits] was eliminated, because it actually makes the situation worse than it would be than if we just raised taxes on higher income Americans to close the deficit.”
As Michael Finke, professor and Frank M. Engle Chair of Economic Security at the American College of Financial Services sees it, “There are only two ways to prevent the benefit cuts — raise taxes or reduce benefits. No politician wants to cut benefits, so it seems inevitable that taxes will go up.” The professor sees the Act as a good first step, but not an ultimate solution.
Can the Act Pass Both Houses of Congress?
According to Emerson Sprick, the associate director for economic policy at the Bipartisan Policy Center, the chance that this act becomes law in the current year is low. For starters, it’s an election year, and the current composition of the House of Representatives also makes it unlikely.
Blanchett agrees, saying “I’m honestly not sure whether or not this is going to make it through Congress. I think it’s easier to suggest it’s unlikely to make it, given the divided political climate and how the costs are being apportioned.”
The Bottom Line
In terms of extending the viability of Social Security, the You Earned It You Keep It Act seems to have merit. In the words of Stephen Goss, chief actuary for the Social Security Administration, “The date of projected depletion of the combined OASI and DI Trust Fund reserves would be moved from 2034 under current law to 2054 assuming enactment of the proposal, under the intermediate assumptions of the 2023 Trustees Report.”
That’s 20 full years of economic viability for the program. Unfortunately, given the current political climate and the fact that it’s an election year, the act doesn’t seem destined to pass in 2024.
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