For the first time in decades, Congress may be ready to address the problems facing Social Security. On January 30, with widespread support from fellow Democrats, Rep. John Larson (D-CT), chairman of the House subcommittee that oversees Social Security, introduced H.R. 860, or the Social Security 2100 Act, a bill designed to make the system solvent and improve financial security for future retirees. Sen. Richard Blumenthal (D-CT) has also introduced the Social Security 2100 Act in the Senate.

There is widespread agreement that Social Security reform is needed, as the program now spends more than it collects, and Social Security’s trustees project that it will be unable to pay full benefits in 15 years. Failure to address the program’s funding problems could imperil the financial security of millions of Americans who will eventually rely on Social Security’s retirement and disability benefits. But Democrats and Republicans have generally differed over whether to balance the system with payroll tax increases or benefit cuts.

Why does Social Security need a financial improvement?

Social Security, the nation’s largest public program, is a lifeline for millions of retirees, workers with disabilities, and their families. The system pays $84 billion per month to nearly 63 million beneficiaries. For 50 percent of Americans ages 65 and older, benefits account for at least half of their income (PDF). Yet many Social Security disability insurance beneficiaries face financial hardship, and increasing shares of retirees will be unable to sustain their preretirement living standards unless retirement benefits increase.

Social Security’s finances have been precarious for decades. The system was just weeks away from being unable to make full payments to beneficiaries in April 1983 when President Reagan signed legislation (PDF) that closed the program’s financing gap by cutting benefits, raising payroll taxes, and imposing income taxes on Social Security payments to high-income beneficiaries.

With tax revenues exceeding benefit payments for decades after 1983, Social Security built up a trust fund to help finance benefit payments when millions of baby boomers began retiring. But by 1991, Social Security’s trustees (PDF) concluded that the 1983 reforms were not enough, warning that their intermediate projections showed that the system had fallen out of long-range actuarial balance and would be unable to pay full benefits after 2041.

Last year, the trustees released their latest intermediate projections showing that the trust funds will run out in 2034 if Congress and the president can’t agree to cut benefits or raise revenues. If that happens, Social Security will be able to pay only about three-quarters of scheduled benefits.

What would the Social Security 2100 Act do?

Social Security’s actuaries project that the proposal would permanently close Social Security’s financing gap (PDF) by raising payroll taxes. Currently, employers and employees each contribute 6.2 percent of payroll to the system. The bill would gradually raise the payroll tax rate until it reaches 7.4 percent for both workers and employers.

Only earnings up to Social Security’s annual taxable maximum, which is set at $132,900 in 2019 and is indexed to average earnings, are taxed and count toward future benefits. The Social Security 2100 Act would additionally tax all annual earnings above $400,000, creating a tax “donut hole” for annual earnings between $132,900 and $400,000. That donut hole would gradually disappear as the taxable maximum grows until it reaches $400,000, when all earnings become subject to Social Security’s payroll tax. Workers would earn future benefits on salaries above $400,000 but at a very low rate.

The bill aims to raise future payments to all Social Security beneficiaries by changing the formula used to calculate benefits and the index used to compute cost-of-living increases after benefit take-up. It would also establish a minimum benefit equal to 125 percent of the federal poverty level and exempt more Social Security benefits from federal income taxes.

What’s next?

If the Social Security 2100 Act passes the House, it must still pass the Republican-controlled Senate and be signed by President Trump before it becomes law. Republican-sponsored plans to fix Social Security have generally focused on cutting benefits. For example, the Social Security Reform Act of 2016, introduced by now-retired Rep. Sam Johnson (R-TX), the previous chair of the House subcommittee overseeing Social Security, would increase the full retirement age, reduce cost-of-living adjustments, and change the benefit formula. It would make Social Security solvent (PDF), but most beneficiaries would receive lower payments than if Congress simply let the trust fund run out (PDF).

Over the coming weeks, we’ll be working with our Urban Institute colleagues to delve deeper into the Social Security 2100 Act. DYNASIM, our microsimulation tool, projects income and wealth under current law and alternative policy options for the entire population. We’ll examine how the bill would shift the distribution of taxes and benefits, affect various population groups, and improve beneficiaries’ overall financial security to give policymakers the information they need to make sound decisions about the future of Social Security.