Could Social Security Be Saved by the ‘Buffett Rule’?

Among the chief proposals to fix Social Security before a major funding source runs out of money is to have wealthy Americans pitch in through higher taxes and lower benefits. One way to do that is through the so-called “Buffett Rule,” named after mega-billionaire investor Warren Buffett. The name has its roots in an Obama-era economic policy stating that no household earning more than $1 million a year should pay a smaller share of their income in taxes than middle-class families pay, according to the Obama White House National Archives. Buffett himself once famously pointed out that he paid a lower tax rate than his secretary — even though the Berkshire Hathaway chairman was one of the world’s richest people at the time and remains so today, with a net worth of about $115 billion. To address that problem, the Obama administration proposed that no millionaire pay less than 30% of their income in taxes. The proposal was part of President Barack Obama’s 2011 tax bill, while the “Buffett Rule” inspired legislation known as the “Paying a Fair Share Act.” That legislation was first introduced and rejected by Congress in 2012. Similar legislation was introduced and rejected in subsequent years. Today, the Buffett Rule and other proposals to draw more tax revenue from the wealthy have gained support as a way to save Social Security before the program’s Old Age and Survivors Insurance (OASI) Trust Fund is depleted. That’s expected to happen as early as 2032 or 2033, leaving Social Security solely reliant on payroll taxes — which only cover about 77% of current benefits. As GOBankingRates previously reported, President Joe Biden has rolled out a four-point plan to boost Social Security that would mostly impact high earners and company executives, who tend to have much bigger retirement savings accounts than the typical American. The Biden plan would raise the income threshold on wages subject to Social Security payroll taxes. Currently, all wages above $160,200 are not subject to the taxes. Among Biden’s proposals is to tax earned income above $400,000, leaving wages between $160,200 and $400,000 untaxed for this purpose. Another proposal that could bolster Social Security is the “Medicare and Social Security Fair Share Act,” which was introduced by Sen. Sheldon Whitehouse (D-R.I.). It aims to reform the taxes Americans contribute to the two programs so that the richest 2% of Americans pay taxes on most of their income the same way that middle-class taxpayers already do, according to the Institute on Taxation and Economic Policy (ITEP). In an analysis released this week, the ITEP noted that high-income Americans are likely to receive much more of their income from investments, which are not subject to Social Security taxes. Under the Medicare and Social Security Fair Share Act, “virtually no one” outside of the richest 5% of taxpayers would pay more in taxes, while 93% of the total tax increase would be paid by the richest 1% alone in 2024. Bringing more tax revenue in from the wealthy would address a few main problems with Social Security taxes, according to the ITEP analysis. One problem is that taxes that finance Social Security are “regressive” because they only apply to earnings — not investment income — and these earnings are capped at a level “far below what the best-compensated Americans make every year,” the ITEP noted. Another problem is that Social Security as a whole is “progressive” because benefits replace a larger share of earnings for low-income people than high-income people. These dynamics contribute to a third problem: The share of total earnings in the U.S. that are subject to Social Security taxes continues to fall. The ITEP cited Congressional Budget Office data showing that 90% of earnings in the U.S. were subject to Social Security taxes in 1983, but that share has since fallen to 83%. The Medicare and Social Security Fair Share Act would help fill that gap by ensuring that well-off people pay a tax of 17.4% on their income to fund Medicare and Social Security, whether that income is from wages or investments. Combined, these higher taxes could generate an additional $249.8 billion to fund Social Security and Medicare in 2024, according to the ITEP.