SOCIAL SECURITY IN NEBRASKA: ADDRESSING SOLVENCY ISSUES WITHOUT CUTTING BENEFITS

Social Security: Nebraska’s Lifeline

Social Security is a lifeline for older Americans, workers who develop disabilities, and families in which a spouse or parent dies. Most American families will be touched by Social Security at some point, and Nebraskans are no exception. There are approximately 365,000 Social Security beneficiaries in Nebraska, with 277,000 of those beneficiaries receiving retirement benefits. Nearly 55% of Nebraska retirees rely on Social Security for at least 50% of their total income, and about 28% of them rely on Social Security for 90% or more of their total income.

How Social Security Works

The current Social Security system works like this: employers and employees each pay 6.2% of wages up to the taxable maximum of $168,000 (in 2024), while the self-employed pay 12.4%. The taxable maximum has increased yearly since 1975 based on average wage growth, but due to rising income disparities, the rate of increase has not kept pace with the increasing proportion of wages above the tax cap. The money paid in taxes is then used to pay benefits to people who have already retired, people with qualifying disabilities, survivors of workers who have died, and dependents of beneficiaries.

Social Security replaces a percentage of a worker’s pre-retirement income based on lifetime earnings to ensure that people have income after they retire. The amount of your Social Security retirement benefits depends on how much you earn and when you choose to start benefits. Those who start benefits before “full retirement age” (between 66 and 67 depending on birth year) receive a lower percentage; those who wait longer receive a higher percentage.

Most Nebraskans can expect to pay Social Security payroll taxes throughout 2024. However, top earners with gross annual wage income of $1 million stopped paying into the program on March 2, which is when they hit the $168,000 threshold. With Social Security’s solvency in trouble, earnings above the threshold are seen as a possible source of additional funding, and it’s evident why: if the tax cap of $168,000 were scrapped and everyone paid the same tax rate, the amount of extra taxes paid by someone with an income of $1 million would be $51,546.80.

Trouble on the Horizon

Social Security’s combined trust fund reserves are projected to become depleted around 2035, at which time the program would be able to pay only 80% of the benefits scheduled for its nearly 65 million beneficiaries, spelling devastation for the hundreds of thousands of Nebraskans who currently rely on Social Security.

If Congress does not act, we will be faced with an automatic 20% cut in benefits to people already receiving Social Security, the need to immediately increase Social Security taxes by 25%, or some combination of cuts in benefits and an increase in taxes.

Policy Solutions: H.R. 4583 and H.R. 1046

In July 2023, H.R. 4583 was introduced in Congress with more than 175 House co-sponsors. H.R. 4583 would lift the cap on Social Security payroll tax for high earners making more than $400,000, thereby only affecting the wealthiest Americans and adding more to the Social Security reserves to prevent automatic benefit cuts in 2035. The bill could potentially extend Social Security’s solvency until 2066. This bill also proposes taxing investment income for taxpayers making over $400,000 at a rate of 12.4%. The bill would even increase benefits by 2% across the board for all Social Security beneficiaries – the first increase of its kind in 52 years. It would expand benefits to boost lower income seniors and improve benefits for middle-income widows and widowers from two-income households.

In February 2023, lawmakers introduced H.R. 1046, the Social Security Expansion Act, which would enact changes on Social Security benefits and increase taxes for a select group of people. H.R. 1046 would lift the cap on Social Security payroll tax at $250,000, lower than H.R. 4583. It would also increase the net investment income tax and make active trade or business income subject to this tax. Currently, wealthy Americans who live mostly on investment income are not subject to Social Security tax– this would change that.

In terms of changes to benefits, H.R. 1046 would increase the primary insurance amount for certain beneficiaries, meaning they would receive more in retirement benefits at the outset. The bill would also revise the method of calculating cost-of-living adjustments, which would result in increased benefits. Additionally, the bill would establish a new minimum benefit for certain low earners by indexing the benefit level so that it is equal to 125% of the poverty line, or over $18,000 for a single worker who has worked their full career. Finally, the bill would restore student benefits up to age 22 for children of disabled or deceased workers, if the child is a full-time student in college or vocational school.

Meanwhile, On the Chopping Block …

Running parallel to lawmakers’ efforts to expand Social Security are plans to fast-track a vote on Social Security cuts. In January, lawmakers introduced H.R. 5779, a bill to create a bipartisan commission that would tackle federal debt and make policy recommendations to Congress. What programs could be subject to cuts to ameliorate the debt? According to the House Budget Committee chairman, “everything’s on the table.”

To some lawmakers, that statement is ringing alarm bells that Social Security is at risk of cuts. A closed-door process to fast-track a vote on budget decisions could be a recipe for cuts to important programs like Social Security and Medicare. This perspective is shared by advocacy groups like the National Committee to Preserve Social Security and Medicare and AARP, which argue for regular legislative processes over the commission's expedited approach.

Raising The Retirement Age: A False Solution

Currently, the Social Security Administration sets a “full retirement age,” which is the age at which retirees can receive full Social Security benefits. It’s possible to claim benefits before full retirement age, but doing so results in reduced monthly benefits – and vice versa, claiming after full retirement age results in permanently increased monthly benefits.

To some policymakers, including the Republican Study Committee, raising Social Security’s retirement age to 70 seems like an easy solution to addressing the solvency issue. After all, they argue, Americans are living longer, so increasing the retirement age would be commensurate with increased life expectancy. Unfortunately, it’s not so simple.

For one thing, although life expectancy has increased for the highest earners since the 1980s, the bottom half of earners have not seen a similar increase – in part due to the fact that lower earners tend to work more physical jobs, which over time can take a toll on quality of life. And due to structural racism and discrimination across sectors, Black workers in particular face a shorter life expectancy. It’s all too clear which communities would – and wouldn’t – bear the brunt of an increased retirement age.

Lawmakers say big changes are needed to Social Security to prevent across-the-board cuts – but that’s exactly what raising the retirement age would accomplish. Raising the retirement age to 70 would cut average lifetime benefits for new retirees by nearly 20%; and if Social Security’s reserves run out and Congress doesn’t take action, beneficiaries would see a 23% cut.

To the many Nebraskans and other Americans who rely on Social Security, the looming solvency crisis is high stakes. But policy interventions like H.R. 4583 and H.R. 1046 offer solutions that could extend solvency for decades without cutting benefits. Proposals that lift or shift the tax cap, or tax investment income, may allow Social Security beneficiaries to breathe easier knowing they will not see a sudden change in benefits.