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Bernie Sanders Social Security Overhaul Proposal Is Back – The Motley Fool



Sen, Bernie Sanders, an independent and former Democratic President hoping for Vermont, wants Washington to become serious about social security. And he has a point.

According to the June report published, social security is dangerously close to hitting an unwanted inflection point. It will be more than it collects in revenue every year, and it has not happened since 1982. As demographic changes, as the long-term extension of life expectancy, rising income inequality, lower fertility rates and retirement of baby boomers continue, expected net cash outflow from social security.

  Dice lying next to a piece of paper that reads, will your social security be sufficient?

Image Source: Getty Images.

If there is any consolation here, it is that the program is not in danger of going bankrupt due to its sources of recurring revenue – the 12.4% payroll tax on labor income and taxation of social security benefits on individuals and couples earns over certain income limits. Social Security also has nearly $ 2.9 trillion in asset holdings, which means that lawmakers have time to change the program for the better.

But here's the question: As these net contracts spread, Social Security's asset reserves will begin to be exhausted. In 2034, the managers project that the entire program's excess capital will be gone. Should this capital be exhausted and the payout plan proved to be undoubtedly unsustainable, overall performance cuts of up to 21% could follow. With 62% of today's pensioners relying on social security for at least half of their income, it is a prospect that is a source of great concern.

Social security faces an estimated $ 13.2 trillion cut in the long run, which is defined as the next 75 years – ie. through 2092. The question has been and remains how best to solve this financing difference. The Progressive Senator of Vermont believes he has the answer.

Extension of the Social Security Act is back

After its first introduction in March 2015 and another round in February 2017, Sanders and co-sponsors Sen. Cory Booker (DN.J.), Sen. Kirsten Gillibrand (DN.Y.), Sen. Jeff Merkley (D-Ore.), Sen. Kamala Harris (D-Calif.) And Rep. Peter DeFazio (D-Ore.) Has introduced the Social Security Extension Act for the third time.

  Sen. Bernie Sanders speaks at the US Legionic National Convention.

Sen. Bernie Sanders speaks at the US Legion Convention. Image source: Bernie Sanders & # 39; Senate site.

The Social Security Expansion Act, as the name suggests, aims to extend benefits to lower-income individuals and families that depend most of the program while increasing additional revenue to cover Social Security imminent cash deficiency and its expected higher cash needs to expand benefits. Here is an overview of what Sanders plan would bring.

  • Institutes a Donut Hole Tax of Over $ 250,000 in Earnings: Currently, all income between $ 0.01 and $ 132,900 is subject to Social Security's 12.4% payroll tax. Under Sander's plan, there would be a "donut hole" between the maximum tax base of $ 132,900, which increases annually in line with the national average wage index and $ 250,000, where labor income would not be subject to payroll tax. In addition to $ 250,000 in work income, the payroll tax will be reinstated, leading to additional revenue collection.
  • Changes inflation idea to CPI-E: The consumer price index for city workers and office workers (KPI-W) has been Social Security's inflation measure for cost-of-living adjustments (COLA) since 1975. But as the name suggests , it does not measure the seniors' spending habits and thereby underestimates medical care and housing costs and overweight other costs, which do not matter. Switching to the Consumer Price Index for the Elderly (CPI-E) will help address this problem by focusing on the costs that are significant to households with seniors aged 62 and over. Presumably this will lead to higher annual COLA's.
  • Increases Benefits for Lifetime Depositors: This provision aims to make it easier for employees to qualify for social security, and to ensure that paid out minimum benefits increase significantly for those involved in the workforce for many decades. For context, the smallest monthly benefit today is far below the federal poverty level.
  • Gives a 6.2% tax on investment income for high-income individuals: At present, net income tax (NIIT) affects investment earnings for individuals with adjusted adjusted gross income (MAGI) above $ 200,000, and couples over $ 250,000, with a 3, 8% surtax. Under Sander's proposal, NIIT would increase to 10%, which would give a 6.2 percentage point higher tax on investment income for wealthy people and couples who would help finance social security.
  • Restores student benefits up to age 22 for children of disabled or deceased workers: This provision would restore what was discarded under the 1983 amendments, allowing retrained students to reap benefits.
  • Provides a cross-cutting advantage: Finally, primary insurance amounts will be adjusted to provide higher benefits across the board. According to the proposal, the average low-income recipient would see their payout rise by about $ 1,342 a year.

Apply these changes, and Sanders' expense should extend Social Security's discharge date beyond 52 years to 2071.

  An elderly man counts a tense pile of cash in his hands.

Image Source: Getty Images.

Is the third time the charm?

Now for the very important question: Is the third time the charm of the Sanders' Social Security Expansion Act? Well … No.

The first question that Sanders would have to overcome is that his bill is not even the most popular progressive social security fly that is flown on Capitol Hill. Within the last few weeks, John Larson (D-Conn.) Again raised the Social Security Act 2100, also for the third time. Larson's bill, however, was introduced this time with more than 200 co-sponsors. With a democratically-rounded house, it has a fair shot at coming up for voting and ending. As the Senate and the Presidency are under GOP control, the bill is likely to be dead upon arrival at the Senate, and / or President Trump would veto it as he does not favor direct corrections to the program.

Another problem with Sanders' proposal is that the KPI-E does not completely solve the inflation problem faced by seniors. Yes, KPI-E presumably assumes medical care and housing inflation much better than KPI-W has done. But there are still shortcomings. For example, CPI-E is not a factor in Medicare Part A costs. Long story short, the purchasing power of social security income would continue to fall below Sander's plan, just at a slower pace than it currently does.

However, the biggest problem with Sander's plan is that it does not take into account responses from wealthy individuals to higher tax rates. If we look at our history books at a time when the marginal tax on the rich was significantly higher, we often find that the rich become creative to legally avoid taxes. Although federal taxes are many times easier to avoid than FICA taxes (for social security and Medicare), it is possible that we could see fewer revenue collected than expected as the rich change their income approval. Thus, it may end up having a negative impact on the long-term growth rate of the US economy.

While Sanders' plan provides a number of well-liked improvements, it's still a lot to be desired, basically. 19659028] fool.insertScript (& # 39; facebook-jssdk & # 39 ;, // connect.facebook.net/en_US/sdk.js#xfbml=1&version=v2.3&#39 ;, true);
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