|
We recently estimated that the Senate reconciliation bill would add $3.5 to $4.5 trillion to the debt. The bill does not include any significant direct changes to Social Security and Medicare, since the reconciliation Byrd rule does not allow changes to Social Security spending or payroll tax, and Congress rejected efforts to make large changes to Medicare and cut waste.
However, OBBBA would impact Social Security and Medicare indirectly, mainly by reducing the revenue collected from the income taxation of Social Security benefits, which is deposited into the Social Security and Medicare trust funds.
Under current law, Social Security benefits are 50 percent taxable for seniors with over $25,000 ($32,000 for couples) of annual income, and 85 percent taxable for seniors with over $34,000 ($44,000 for couples) of income. That 50 percent is deposited into the Social Security trust fund, and the additional 35 percent into Medicare’s Hospital Insurance (HI) trust fund.
This year, the Social Security and Medicare Trustees project taxation of benefits to bring in $100 billion of revenue. They expect that to rise to more than $140 billion by 2027, mainly because the 2017 tax cuts are scheduled to expire, and so seniors will pay higher tax rates on their income, including their Social Security benefits.
OBBBA would not only extend most of the 2017 tax cuts but also expand them and add further tax cuts on top of them. Of particular relevance for Social Security beneficiaries, the Senate version of OBBBA would increase the total standard deduction for many senior couples by over $13,000 (including a temporary $12,000 increase in the additional senior deduction) in 2026, to over $47,000. This would reduce the number of seniors paying taxes on their benefits and reduce the marginal rate at which some of their benefits were taxed.
We estimate that the extension and expansion of the 2017 tax cuts, the expanded senior deduction, and other OBBBA changes would reduce total taxation of benefits by roughly $30 billion per year. This would be enough to accelerate insolvency of the Social Security Old-Age and Survivors (OASI) trust fund from early 2033 to late 2032 and to accelerate insolvency of the HI trust fund from late 2033 to mid-2032.
Upon insolvency in 2032, we estimate that Social Security beneficiaries would face an across-the-board benefit cut of around 24 percent – even deeper than the cuts scheduled under current law. HI payments, meanwhile, would be cut by 11 percent.
Rather than exacerbate the problem by passing a bill that advances insolvency, policymakers should begin pursuing trust fund solutions to head off this outcome.
|