The Rich People 'Cap' That Could Help Save Social Security

Social Security benefits as you know them could soon undergo significant changes. Social Security Administration's (SSA) Chief Actuary Karen Glenn recently estimated that the trust fund will be insolvent by late 2032. Since federal law does not give the fund the ability to borrow money, if the program becomes insolvent, everyone receiving Social Security payments could see a full-scale reduction in benefits.

With that deadline in mind, many proposals aimed at preventing insolvency have been circulating. The suggested options involve cutting benefits and increasing payroll taxes for higher earners and raising the Social Security retirement age. 

One proposal from the Committee for a Responsible Federal Budget (CRFB) would place a cap (called the Six Figure Limit, or SFL) on the amount that a couple could receive from Social Security. The cap would limit couples to an annual benefit of $100,000 and single recipients to $50,000. By limiting how much the richest retirees get from Social Security, the cap would increase payable benefits for up to 80% of the lowest-paid beneficiaries. As far as protecting Social Security from insolvency, the proposal could save $190 billion over a decade and close 20% of the solvency gap if it's indexed to inflation. In this scenario, it would also close up to 60% of the program's 75th-year deficit. 

As of now, the SFL is simply a proposal that would only provide small savings initially, but its benefits would grow in the future. Notably, the cap alone won't restore the solvency of the program. It might need to be implemented together with increases in the payroll tax, along with eliminating the maximum taxable amount for Social Security for high-earning workers, making all earnings subject to the 12.4% tax. Currently, high-earning workers don't pay this Social Security tax on amounts they earn over a cap.

The CRFB estimates that 1 million people currently receive benefits that meet or exceed the proposed cap. This is less than 2% of all Americans receiving Social Security benefits. However, as currently proposed, the SFL would be progressively implemented, and it would only initially affect about 0.05% of couples. Under the proposal, they would have to have a net worth of at least $65 million, receive over $100,000 from Social Security, or have a total retirement income of more than $2.5 million per year. Those limitations would slowly change over time.

The committee estimates that if the SFL were implemented immediately, by 2030, no Social Security recipients with payment amounts in the bottom 90% would be affected. Even by 2060, retirees receiving payout amounts in the bottom 70% would not be affected by the SFL. Only upper-class retirees and those receiving larger-than-average payouts would see a reduction in benefits.