Editor's Note: This story originally appeared on SmartAsset.com.
Big changes to Social Security could be coming.
A new proposal from U.S. Rep. John Larson (D-Conn.) calls for a benefit bump for current and new Social Security beneficiaries, an overhaul to how the annual cost-of-living adjustment (COLA) is formulated and increased payroll tax collections on the wealthiest Americans.
The legislation, dubbed “Social Security 2100: A Sacred Trust” was expected to be introduced the week of Oct. 18 on Capitol Hill, but has since been delayed, according to Larson’s communications director, Mary Yatrousis.
Proposed Changes to COLA
Social Security benefits have been adjusted each year since 1975 to keep pace with inflation. Next year’s 5.9% increase will be the largest in four decades as inflation has pushed the price of goods and services up over the last year.
Tweaking how the annual COLA is calculated is among the most consequential changes in Larson’s proposal.
The current Social Security COLA formula is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). However, senior citizen advocates note the CPI-W underweights certain expenses, like health care and housing, which are especially vital for seniors.
As a result, the Senior Citizens League says Social Security benefits have lost over 30% of their purchasing power since 2000, largely due to inadequate COLAs and rising health care costs.
But Larson wants to change that. Under his proposal, the annual COLA would be tied to the Consumer Price Index for the Elderly (CPI-E).
The Senior Citizens League previously estimated that an average beneficiary who filed for Social Security 30 years ago would have received nearly $14,000 more in retirement if the CPI-E had been used to calculate COLA
“This provision will help seniors who spend a greater portion of their income on health care and other necessities,” according to a fact sheet released by Larson’s office. “Improved inflation protection will especially help older retirees and widows who are more likely to rely on Social Security benefits as they age.”
Impact on High Earners
Larson’s plan would be funded, at least in part, by taxes on Americans who earn more than $400,000 per year.
In 2021, any earned income that exceeds $142,800 is exempt from the Social Security payroll tax, a 6.2% tax that funds nearly 90% of benefits. The cap, which rises each year, will be $147,000 in 2022.
However, under Larson’s proposal, any income that exceeds $400,000 would be subject to the tax. That means a person who earns $1 million in 2022 would pay 6.2% on the first $147,000 of income, and then 6.2% of the final $600,000 he or she earns that year.
Benefits Bump
Larson’s plan comes as the future of Social Security is in a state of flux. Government officials announced this summer the Old-Age and Survivors Insurance Trust Fund, which pays out Social Security benefits, will run out of money by 2033, one year earlier than anticipated.
If the trust fund runs dry, that doesn’t mean Social Security will collapse. Rather, the government would be able to pay out only 75% of benefits.
As a result, Larson wants benefits to increase for current and new beneficiaries. His proposal calls for a benefit hike that would be the equivalent of around 2% of the average benefit.
“The U.S. faces a retirement crisis, and a modest boost in benefits strengthens the one leg of the retirement system that is universal and the most reliable,” the fact sheet states.
Bottom Line
While it remains to be seen when Larson’s bill will be formally introduced, it’s clear he and other congressional Democrats are intent on making significant changes to Social Security.
The plan calls for an increase in benefits, hitching the annual COLA to the Consumer Price Index for the Elderly and taxes on Americans who make more than $400,000.
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