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The Washington Post is reporting this morning that Senate Democrats will propose the RAISE Act which would do three basic things according to the Post:

1. Increase Social Security benefits for several groups of recipients such as many divorced spouses, widows, and widowers. It would also extend benefit eligibility to more children of retired, disabled, and deceased workers.

2. It would bolster the Social Security Trust Fund. With no changes, the current actuarial forecast is that Social Security will be able to pay all promised benefits and cost of living increases into the early 2030s, then about 75% of promised benefits thereafter. The RAISE Act would push that date out (including the increase in benefits) a couple decades or more.

3. A 2% "payroll tax" would added on earnings above $400,000.

I don't have any more details than these, but here are a few observations in no particular order. First, this proposal will be popular. It's consistent with what large majorities of Americans say they prefer. The erosion of incomes and retirement savings in the U.S. among poor and middle class Americans is real and significant, caused in large part by the disintegration of employer-provided defined benefit pensions. Social Security has now become more important than ever in providing bedrock retirement, disability, and survivors' security.

However, absent a bigger electoral surprise in 2014 than I would forecast, I assume Republicans will block the RAISE Act. So it or something very much like it is probably going to be deferred until 2017, after the next presidential election. In 2017 this bill should have a good chance of passing, I would predict.

The funding mechanism in the RAISE Act is very similar to the Medicare surtax that passed in 2009 as part of the Patient Protection and Affordable Care Act ("Obamacare"). I don't think this is at all surprising, and I certainly predict that this'll be the fundamental way Social Security's financial base is strengthened into the 2050s or beyond.

OK, turning to U.S. citizens, U.S. nationals, and U.S. permanent residents living overseas. I'll be interested to see the details of this Social Security surtax proposal, and the details are important. Nearly everybody reading this post would be entirely unaffected by the tax provision in this bill since $400K/year is a significant sum. It's approximately 8 times the median U.S. household income, for reference. It's right at the cutoff for the top percentile (top 1%) of the income distribution -- not a coincidence, I assume. Of course the surtax would only be paid on dollars earned above $400K, not on any of the first $400K of earnings. You would have to earn well above $400K before you start to pay non-trivial amounts of Social Security surtax.

I would temper that a bit by saying that that $400K figure is likely per couple, Married Filing Jointly, since that's the "headline" number that usually gets presented in these proposals. If you're Single or Married Filing Separately then presumably the threshold would be somewhat lower, but that's only a guess. It's also unknown at this point whether the thresholds are indexed. This 2% surtax might make it that much more attractive to choose Married Filing Jointly in many cases, notably when you have one very high earning spouse and one less high earning (or non-earning) spouse in the household. I assume super high income earning individuals will be nudged a bit toward considering renunciation of U.S. citizenship for tax reasons, though if the 2% surtax is added to the exit tax then maybe they'll be even less inclined than now.

The Medicare surtax doesn't seem to be avoidable via the Foreign Tax Credit even if you do live in a comparatively high tax jurisdiction. This Social Security surtax might have the same character if it's implemented exactly the same way, but one hopes this proposal would fix that. However, my working assumption for the moment is that this proposed surtax would work like a new tax bracket but with fewer ways to avoid it than a "regular" tax bracket. Said another way, my assumption is that it would be raising general revenues from the highest income earners and dedicating that revenue to the Social Security system.

It'll also be interesting to see whether this is really a "payroll" tax (i.e. assessed only on earned income) or whether it'll be broadly applied to all forms of income. I'd prefer the latter -- though I've always maintained that capital gains should be indexed, but that's another topic for another day.

Over on the benefit side, reading between the lines and taking an educated guess there are at least a couple provisions that look quite helpful to significant groups of expatriates and their children, especially. Obviously a lot of expatriates are retirees receiving Social Security benefits, so increasing some benefits and assuring continuation of 100% of promised benefits way past the 2030s would all be most welcome.

I'd also note that those paying that 2% are, on average, going to get some of it back in the form of higher earnings and higher returns on their investments. Social Security benefits get spent, quite simply. Raise benefits, especially in the ways the RAISE Act is likely to do (targeted at recipients with an extremely high propensity to spend), and the overall economy enjoys a consumption boost. Consumption drives business growth, and business growth drives wealth primarily at the top of the income distribution. It's the after tax income and its purchasing power that counts in the end, not the taxes paid or the tax rate.

There's much speculation here. If I see more details about this RAISE Act proposal I'll post a follow-up. To net it out, though, something like the RAISE Act -- increase Social Security benefits to some extent, extend the trust fund out to the 2050s or beyond, and raise general revenues from the highest income Americans to fund the changes -- is the basic recipe I would predict would come to pass within the next few years. So, yes, there's probably going to be a U.S. federal income tax hike on the $X-to-Infinity earning cohort where X will be a rather meaty number like $400K.

Thankfully the U.S. is in much better demographic shape than practically every other developed economy in the world, so the U.S. recipe will be quite mild in contrast.
 

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I just wonder how this proposed "surtax" will fit in with the existing social security treaties. Other than high rolling executives on a limited term assignment overseas (who are often "allowed" to remain in their home country social security scheme), I wonder how many overseas taxpayers actually pay US Social Security.
Cheers,
Bev
 
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