Without Social Security, millions of older Americans today would not be able to manage their expenses. Unfortunately, Social Security is facing some serious challenges in the coming years as baby boomers retire in droves.
Social Security’s main source of funding is payroll tax revenue. But as boomers retire and the labor force shrinks, that income stream is apt to wane.
At this point, it’s estimated that the Old-Age and Survivors Insurance Trust Fund from which Social Security pays retirement benefits will run out of money in 2032. At that point, the program may have to cut benefits if lawmakers don’t manage to come up with a solution sooner.
The good news is that there are multiple options lawmakers are considering to prevent Social Security cuts. The bad news is that each one comes with a built-in drawback.
Raising the payroll tax rate
Social Security’s current payroll tax rate is 12.4%. Workers and employers split that bill evenly, though the self-employed have to cover it themselves.
One option for preventing Social Security cuts is to raise that 12.4% rate. But that could leave millions of workers today with higher taxes they can’t afford.
Plus, employers will be burdened with higher payroll taxes, which could have other consequences. It could result in companies cutting benefits or, worse yet, staff.
Raising Social Security’s wage cap
Social Security doesn’t tax all wages. There’s a cap that’s established each year.
In 2026, the wage cap is $184,500. Earnings beyond that point are exempt from Social Security taxes.
Another option to prevent Social Security cuts is to raise the wage cap — or even eliminate it. But that’s a problem, even though it might seem like a no-brainer solution.
Social Security has a maximum monthly benefit it pays retirees that’s tied to the wage cap. If that cap increases, to keep things fair, the program’s maximum benefit should also increase. If it doesn’t, and the increase is one-sided, it changes the very nature of Social Security.
Raising full retirement age
Full retirement age, or FRA, is when Social Security recipients can collect their benefits without a reduction. That age is 67 for people born in 1960 or later.
Raising FRA could help prevent Social Security cuts by keeping people in the workforce longer, thereby increasing payroll tax revenue. But it could sentence many workers to a longer career than they want.
This change could also end up putting physical laborers at a disadvantage. People who do physical work may not be able to extend their careers due to health limitations, thereby forcing them to retire earlier, claim benefits sooner, and reduce their monthly checks for life.
Capping Social Security payments for the wealthy
A recent proposal aims to cap Social Security benefits at $100,000 annually for couples and $50,000 for singles retiring at FRA. The logic is that people who are eligible for larger benefits probably don’t need the money, and capping payments conserves resources for Social Security.
But the problem here is similar to raising the wage cap without raising Social Security’s maximum monthly benefit. Social Security is not supposed to be a welfare program. Capping payments for some recipients turns it into one to some degree.
A solution needs to be found soon
Ultimately, lawmakers have a tough road ahead of them to prevent Social Security cuts. But with the program’s insolvency date being a mere six years away, they’re going to have to move quickly.
Unfortunately, though, Americans might need to brace for the fact that whatever option lawmakers choose to prevent program cuts is going to have some sort of unwanted repercussion.
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