New Social Security Tax Plan Carves Income ‘Donut Hole’

The Social Security 2100 Act of 2023 is a proposed legislation that would reinstate taxes on the 1.8% of earners who make more than $400,000. This is ostensibly to solve social security’s financial woes.

Democratic Representative John Larson submitted legislation intending to protect America’s cornerstone retirement program in July. It would be the first improvement for Social Security seniors in 52 years if passed.

Earnings beyond $160,200 in 2023 will be exempt from the Social Security payroll tax due to the present law’s threshold. Larson’s proposal implements a “donut hole,” preserving a tax-free zone for the upper class and 20% of the workforce with incomes between $160,200 and $400,000. But incomes over $400,000 would be taxed again, aimed at the wealthy while sparing the middle and lower classes.

Improvements to cost-of-living adjustments, increased student funding, and consolidating the OASI and DI Trust Funds into a single pool are all part of the Social Security 2100 Act. From 2025 to 2034, the yearly Social Security surplus would increase by 1% to 1.1% of the payroll under present legislation.

In line with President Biden’s description of Social Security and Medicare as a “sacred trust” with American pensioners, Max Richtman, CEO of the National Association to Preserve Social Security and Medicare, has defended the measure as a “commonsense approach” that will make the wealthiest pay their fair share.

However, a vote on the measure in the House is quite improbable because Democrats and Republicans are currently focused on preventing a government shutdown.

Ex-Treasury Assistant Secretary for Economic Policy Alicia Munnell expressed skepticism about the 2023 Act, raising worries about the potential for temporary hikes to become permanent and the constitutionality of tying payroll taxes to investment income. She emphasized that it is crucial to address Social Security’s financial concerns but that the strategy must be intelligent and sustainable to ensure the program’s long-term profitability and stability.

Despite Munnell’s criticisms, the plan to raise the payroll tax ceiling has received support from MPs on both sides of the aisle.