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This Social Security reform bill could be back on the table

The Motley Fool logo The Motley Fool 1/21/2019 Dan Caplinger

Washington is going through major changes in the wake of the 2018 election, with Democrats taking control of the House of Representatives for the first time since 2010. As a result, many proposals on key issues that have gone nowhere for years are suddenly getting new life, and even with divided control of the government, it's still possible that some of those proposals could get some forward momentum.

Social Security remains in danger of major benefit cuts in the future, and there have been proposals from both sides of the aisle to shore up its long-term finances. Now, one such proposal looks like it's going to get some attention in the coming months, and many Social Security recipients hope that its provisions to give them additional benefits and ensure the viability of the system for decades to come will become law.

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Welcome back, Social Security 2100 Act

Rep. John Larson (D-Conn.) has submitted a Social Security proposal on multiple occasions in previous sessions of the federal legislature, and it's likely that he'll present another version of it for the current congressional session. When he does, the newest version of the Social Security 2100 Act will share many of the same attributes as its precursors. Those included the following:

  • An immediate increase in Social Security benefits equal to about 2% of the average benefit amount for current and new Social Security participants.
  • The adoption of a new measure of inflation for determining annual cost-of-living adjustments to benefit payments. The current measure would be replaced by the CPI-E, an inflation benchmark that incorporates goods and services that are more appropriate for the older Americans who are the primary recipients of Social Security benefits.
  • A minimum benefit set at 25% above the federal poverty line to ensure that low-income workers avoid poverty in retirement.
  • Higher income thresholds for tax-free benefits, with the income levels at which a portion of Social Security can become included in taxable income rising from $25,000 to $50,000 for single filers and from $32,000 to $100,000 for joint filers.

In addition, the bill would ensure that any increase in benefits under its provisions wouldn't hurt eligibility for other key federal programs for the needy, including Supplemental Security Income, Medicaid, and the Children's Health Insurance Program.

Those extra benefits will cost money, and the Social Security 2100 Act has funding mechanisms as well. They include two primary sources of new revenue for the program:

  • Collection of Social Security payroll taxes on wages and self-employment above $400,000. Currently, all wages above the wage base limit -- $132,900 in 2018 -- are free of the payroll tax.
  • A phase-in of higher payroll tax rates for Social Security, which would eventually take the current level of 6.2% up to 7.4% by 2042.

Why the proposal could get more attention this time around

Larson's proposal didn't go anywhere in previous sessions, but this time's different. That because the Connecticut representative is likely to assume the role of chair of the Social Security subcommittee to the powerful House Ways and Means Committee, giving him the power to hold hearings on the legislation and call votes that will send the bill to the floor of the full House. From there, it's even possible that the Social Security 2100 Act will get an approval vote.

After that, of course, things get a lot more uncertain. The bill lacked any bipartisan support in the previous session, as all of the bill's cosponsors in the last Congress were Democrats. Yet with the changed political climate in Washington, it's possible that Republicans could either work with Larson's proposal or at least borrow parts of it in trying to craft a middle-ground solution.

In the end, the Senate is unlikely to adopt the legislation in anything close to its current form. Higher payroll taxes and a boost to the wage base are two areas where Republicans vehemently disagree with Democrats.

Nevertheless, as key dates for sustaining Social Security's financial health get closer, there'll be more discussion about issues surrounding the program. Even if it doesn't get across the finish line, the Social Security 2100 Act is going to get a whole lot closer than it has in recent years.

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