New bill seeks to save retirement for the middle class, but is it too little, too late?

Congress has proposed a bill that would keep more of taxpayers’ hard-earned money from slipping away.

Introduced by Rep. Angie Craig from the state of Minnesota, the legislation is designed to erase hefty federal taxes on Social Security benefits for retirees starting as soon as next year.

The “You Earned It You Keep It Act,” as it’s called, offers a solution to elusive funding, with the proposed addition of a fresh revenue stream to keep Social Security alive for the next two decades.

This is music to the ears of retirees, who have been hit with a one-two punch of skyrocketing housing costs and lofty inflation.

As things stand, approximately 40% of retirees who receive Social Security must pay taxes on as much as 50% of benefits, a liability that Rep. Craig’s bill seeks to eliminate.

This legislation would also ensure that Social Security benefits don’t come to a screeching halt in 2034, which is when the tap on certain funds is projected to run dry.

“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,” Rep. Craig said. “And on top of that, it’s fiscally responsible. I’m leading the charge on this issue in Congress because we need to get money back in the pockets of middle-class Americans.”

While lawmakers might be looking to reduce taxes, the Social Security pot has been shrinking and threatening the full retirement of Americans in the years to come. Rep. Craig’s bill could be a step in the right direction, but it might also be too little, too late.

Social Security’s smoking gun

America’s middle class has been getting squeezed out of the earnings pie, with 72% of households earning between $30,000 and $100,000 a year feeling as though they can’t keep up with the high cost of living, as of 2023.

Meanwhile, the middle class has also been shrinking over the past five decades, with the share of American adults in this category falling from nearly two-thirds of households in 1971 to 50% as of 2021, according to Pew Research.

If Congress doesn’t act soon, they could be in for a rude awakening when it comes time to retire.

That’s because a report by the Social Security Board of Trustees reveals that the clock is ticking on social benefits. Certain trust fund reserves are at risk of being depleted by the year 2034, after which time retirees would only be entitled to 77% of their scheduled benefits from the system they paid into their whole careers.

Alicia H. Munnell, director of the Center of Retirement Research at Boston College, told CNBC that any Social Security legislation has been absent for about four decades.

“And so we do have this event coming up that forces Congress either to do something or most people’s benefits are going to be cut by [nearly] 25%,” she warned.

Expanding the funding source

Funding for the proposed bill, which was first introduced in 2022 and resubmitted in 2024, would originate from a Social Security payroll tax, which Rep. Craig wants to amend.

As of 2024, the Social Security payroll tax, paid by both employees and employers, is 6.2% alongside a wage cap of $168,600, representing the highest annual income on which the payroll tax is applied. Self-employed individuals must pay a combined 12.4% in payroll taxes.

Incidentally, while employees and entrepreneurs alike pay this tax, the funds are not directed into a personal fund earmarked for their golden years. Instead, the money goes toward a whole system that is set up to fail them in just over a decade, split between current retirees and those with disabilities.

However, an imbalance has emerged that threatens to send the system folding like a house of cards.

“People are having fewer children and because the birth rate is declining you just have fewer workers paying for beneficiaries,” explained Kathleen Romig, a senior policy analyst at the Center on Budget and Policy Priorities.

Rep. Craig’s bill brings it all full circle, taking aim at this tax with one key change: Social Security payroll taxes would include income above the $250,000 threshold, expanding the net to catch higher earners and giving the middle class a better shot at a full retirement.

A mere 7% of Americans earn income above that high bar, and even then it goes further in some cities than others, depending on current taxes and the cost of living.

If the bill passes, the depletion of critical Social Security reserves would be extended from 2034 to 2054, according to a non-partisan analysis commissioned by Rep. Craig.