Can this bill fix Social Security and cut taxes for retirees?

A group of lawmakers say they have a way to cut taxes for retirees while fixing Social Security’s looming funding crisis.

The You Earned It, You Keep It Act, introduced in the House of Representatives in January, would eliminate federal income taxes on Social Security payments for roughly 70 million beneficiaries in 2025. It would also increase revenue by raising the cap on the Social Security payroll tax, so that high earners would pay more into the program.

The trust fund that bankrolls the Social Security program, which is the biggest source of income for most retirees, is barreling toward insolvency. If funds run out by 2033 as projected, beneficiaries would see a universal 23% cut to their payments. Several potential fixes have floated through Congress over the years, like raising the retirement age or lowering the annual cost-of-living adjustment, but they would also require cuts to benefits.

That’s what makes the recent proposal attractive: It would keep the trust fund endowed while actually increasing some retirees’ take-home pay.

Taxes apply to Social Security payments when a beneficiary’s combined income is $25,000 or more a year. While only about 40% of recipients owe taxes on their benefits, critics argue that any tax hurts the sustainability of older Americans’ retirement funds.

Can the bill really put more money in beneficiaries’ pockets and keep Social Security afloat in the long-term? According to an analysis of the bill by the chief actuary at the Social Security Administration, the answer is yes — and as an added bonus, it would also reduce the federal debt by $8.9 trillion a year.

You can find out more about how changing tax rules could save Social Security by reading Money reporter Peter Grieve’s story.

— Mary Ellen Cagnassola, Money reporter

While most Americans have some money in retirement accounts like 401(k)s, nearly a quarter don’t know how much they have saved. That’s according to a recent report from the research arm of insurance company TIAA.

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