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KEY TAKEAWAYS
- A proposal to cap Social Security benefits at $100,000 annually for couples could save the program billions of dollars.
- There are varying cap options that offer different levels of savings and benefit impacts, like indexing the cap to inflation or maintaining the $100,000 cap for 30 years.
- These proposed caps would primarily impact the top 20% to 30% of earners, who typically have significant assets beyond Social Security.
Some retired couples receive more than $100,000 in Social Security benefits each year. One recent proposal suggests capping these benefits to help extend the program.
More than 1.25 million retirees, or about 2% of all Social Security beneficiaries, receive $50,000 or more in benefits each year. That means some couples receive combined benefits of $100,000 or more a year. This generally occurs when both parties consistently earned more than the Social Security taxable maximum for 35 years and retired at their full retirement age. And the benefit amounts for couples with six-figure benefits will continue to rise through the annual cost-of-living adjustment.
However, the Committee for a Responsible Federal Budget (CRFB), a nonpartisan, nonprofit organization that conducts fiscal policy analysis, proposes capping a couple’s annual benefits at $100,000. Initially, this proposal would save the program $100 billion to $190 billion over 10 years.
“Social Security is less than seven years from insolvency, and under the law, when it becomes insolvent, everybody’s benefits get cut 24%...which for a typical couple retiring in 2033 is like $18,000,” said Marc Goldwein, senior vice president and senior policy director at the CRFB. “So the question is, what are we going to do to avoid that?”
Most policy analysts say either tax rates need to increase or benefits need to be reduced, Goldwein said. While the “Six-Figure Limit” alone is not enough to delay Social Security’s insolvency cliff, combined with other solutions, it would help extend Social Security’s lifespan.
Why This Matters
The main trust fund for the Social Security program is set to run out of money by 2032. After that point, the law dictates that all benefits will be reduced, which most beneficiaries say they would not financially survive.
How Would It Work?
This proposal would still reward beneficiaries with higher benefits who wait to claim benefits until after their full retirement age. Beyond that, there are three ways this proposal could be implemented:
- An inflation-indexed cap: The first option would cap benefits for couples who retire at their full retirement age to $100,000 in benefits during 2026. From there, the cap would grow with inflation rates.
- 20-year fixed cap: This option would keep a $100,000 cap for 20 years, then boost benefits annually based on the average wage increase for workers. For example, the average wage increase in 2024 was 4.84%, according to the Social Security Administration.
- 30-year fixed cap: The 30-year cap would work similarly to the 20-year cap, but it would restrict benefits to a maximum of $100,000 until 2056.
How These Options Will Impact Benefits and the Program’s Longevity
These solutions would generally only lower the benefits of the top 20% to 30% of earners, the CRFB said.
“If you’re getting $100,000, as a couple, in benefits, you probably have tens of millions of dollars in assets, and your Social Security benefit is not very important to you,” Goldwein said. “Over time, as this phases in, it’s going to affect more people further down the income ladder, but every version that we model [is always] incredibly progressive.”
The 30-year fixed cap proposal provides the greatest savings, reducing the Social Security budget shortfall over 75 years by 55%, according to CRFB estimates.
“This approach may prove effective in generating upfront savings and ‘buying time’ for other solvency-enhancing policies to phase in,” authors of the CRFB report said.
Read the original article on Investopedia
