More Americans than ever could pay federal taxes on their Social Security benefits this year, according to The Senior Citizens League. These taxes will also take a bigger bite out of Social Security checks.
However, U.S. Representative Angie Craig recently introduced a bill that would eliminate the federal tax on Social Security benefits. Craig is a Democrat who represents the second district of Minnesota. She might be unable to count on help from the White House, though. Here's why President Joe Biden probably won't support Craig's proposed changes.
How the new legislation would change Social Security
Rep. Craig calls her bill the "You Earned It, You Keep It Act." That's not a bad description of what the new legislation would do. It calls for doing away with all federal taxes on Social Security benefits, beginning in 2025.
There is a cost to this change, of course. However, Craig's legislation has that covered, too. The bill also proposes raising the cap on the Social Security payroll tax to $250,000. This cap is set at $168,600 for 2024.
Craig stated in a press release, "This bill is a win-win -- it's a tax cut for seniors and a way to ensure more Americans can depend on the Social Security benefits they've earned." She added, "And on top of that, it's fiscally responsible."
The Chief Actuary of the Social Security Administration (SSA) seems to agree with Craig's claim that the You Earned It, You Keep It Act is fiscally responsible. The actuarial analysis of the bill found that it would push the date of when the Social Security trust funds run out of money from 2034 to 2054. The analysis also estimated that the legislation would reduce the federal debt by a whopping $8.9 trillion (in present value) over the next 75 years.
Why Biden is unlikely to support it
It might seem that President Biden would enthusiastically endorse Rep. Craig's bill. Her proposals would almost certainly be popular with many Americans, especially seniors. A commitment to bolster Social Security while eliminating federal taxes on benefits could seem like a slam dunk for a candidate seeking another four years in the Oval Office.
However, there's one simple reason Biden is unlikely to support the You Earned It, You Keep It Act. He campaigned for president in 2020 on a promise that he wouldn't increase taxes on any households making under $400,000 per year. The White House recently played up that campaign pledge in a post on X (the social media platform formerly known as Twitter):
President Biden has kept -- and will keep -- his promise to not raise taxes by a single penny on households making less than $400,000 a year.-- The White House (@WhiteHouse) January 30, 2024
The legislation introduced by Rep. Craig would increase payroll taxes on all Americans who make more than $250,000. If the president supported this change, he would no doubt be lambasted by Republicans. Breaking such a highly publicized promise would be a nonstarter from a political standpoint.
A potential blueprint for avoiding a Social Security fiasco
This isn't Craig's first attempt to eliminate federal taxes on Social Security benefits and pay for it by increasing the payroll tax. She also introduced a bill under the same name in 2022. It didn't go far then. It probably won't go far in 2024, either, with the GOP controlling the U.S. House of Representatives during a presidential election year.
However, the You Earned It, You Keep It Act could serve as a blueprint for avoiding a Social Security fiasco. It partially addresses Social Security's solvency through the "stick" of higher payroll taxes on wealthier Americans while also providing a "carrot" of eliminating federal taxes on benefits. Whatever Congress ultimately does to prevent Social Security from running out of money, a carrot-and-stick approach will probably be able to pick up more political support than an approach with nothing but benefit cuts and/or tax increases.
The $22,924 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.