Over several years, relying on my 33 years as a Social Security manager and analyst and consulting with an esteemed colleague, I devised a progressive Social Security solvency plan which I call the "B.E.S.T. Social Security Modernization Plan." (B.E.S.T. = Balanced, Equitable, Solvent, and Tested)
Heretofore, I will refer to it as the Plan, as needed. Relying on the Social Security program's history, it does several things: Brings new workers into our nation's compulsory social insurance plan, adds elements of progressivity to Social Security F.I.C.A. payroll tax, the annual C.O.L.A. program, and strongly opposes some of the more common fixes proposed by others to shore up Social Security's trust funds. In addition, the Plan may also beef up the Medicare trust fund, and to serve to partially address the nation's income inequality. The Plan has some fluidity based on results of number crunching by Social Security actuaries.
When the Social Security Act was signed on August 14, 1935, it was a pretty narrow program covering workers and paying retirement benefits. The intent was to expand both coverage and benefits and that is what happened. Benefits were added: disability benefits, spouses, widows and children's benefits and survivor's benefits. Coverage expanded as the self-employed, non-profit employees and other workers were added. Social Security is a "compulsory insurance" program meaning that if you meet the definition of a covered worker you must pay the F.I.C.A or S.E.C.A. (self-employed) payroll tax.
Most would agree that the way we work in 2020 has changed since 1935. The Plan calls for updating the Social Security Act by repealing sections 211 (1) (2) and (3) of the original Social Security Act. These are the three sections of the Act which exclude income from real estate rentals, corporate dividends, and stock market capital gains from being subject to paying the Social Security taxes that every other hard-working American is required to pay. Those who derive income from these three categories are working and should be required to pay Social Security taxes like everybody else. (Long term gains will be excluded from the revised earnings definition.)
Exactly what will this correction to the Social Security Act accomplish?
First, it will require payment of the 15.3% Social Security Self Employment/Medicare tax for these three new categories of workers. (Employees pay a 7.65% Social Security/Medicare tax; employers the other half.) Those who have these types of currently excluded earnings typically have much longer working careers than those who perform hard physical labor. This also means more years of contributions to the Social Security/Medicare trust funds.
Second, once these earnings are properly defined as earned income, not only will they be subject to Social Security taxes, but they will, then be subject to paying federal income taxes at the rates that wages are presently taxed, and the 1.45% Medicare tax which is not subject to the current payroll tax cap. Currently a hedge fund manager may pay a total of only 15% tax on her/his earnings. However, once defined as wages/self-employment, these earnings will be subject to 15.3% Social Security tax, the additional 1.45% Medicare tax on all earned income, plus the federal income tax rates of 25-35% for wages/earned income that other Americans have long been required to pay.
This is not a new tax or tax increase! These are currently existing taxes and tax rates. Why should stock market investors and insiders, who are working at earning a living, pay total taxes of 15% while other workers pay 32-50% tax rates? Including these three categories of workers is part of the natural progression of the compulsory Social Security Program.
Another plan feature is that low wage workers whose annual earnings total or are equivalent to that for a 52 week full-time 40 hour per week federal minimum wage worker can file a tax return and get some of the payroll taxes they paid refunded, making the payroll tax more progressive.
Similarly, those whose earnings exceed the current payroll tax cap for the following five years will pay a higher F.I.C.A/S.E.C.A. amount for that portion of their earnings that exceed the payroll cap.
The Plan is not in favor of scrapping or eliminating the payroll cap: The 2020 Cap is $137,700. Were the cap to be eliminated entirely, those paying taxes above the current cap would either get a very large increase in their benefits further depleting the trust fund, or Social Security would have to revise its formula to add another tier to reduce benefits. The former makes no sense, but the latter will create more staunch opponents to the Social Security programs, reminiscent of the Notch era where many beneficiaries felt cheated, whether or not it was the case.
The Plan is opposed to a stock market transfer tax; the Plan should be a better option.
Years ago, the Plan also called for quick legislation to lower the Medicare eligibility by two years each year. It still does, while ideas for Improved Medicare For All are being debated. Had this been passed five years ago, the Medicare age would be 55 today rather than 65. Some workers delay retirement to be able to keep employer provided health insurance. Earlier retirements could open up some higher paying jobs to younger workers.
Cost of Living Increases (C.O.L.A.s) which are currently a percentage of current benefits could be annually spread out among all beneficiaries and paid out as an equal, flat rate to all or in tiers.
There are more provisions to the Plan and items like the definition of the length short term capital gains, etc. can be tweaked. Some provisions could be implemented in increments.
I'll try to answer any questions in the Comments section.
Some of this information is contained in a blog which I set up in lieu of a book. Start with the earliest post. http://bestsocialsecuritymodplan.blogspot.com