By now, you might have heard that Social Security is on the verge of breaking down. But, thankfully, that’s just not the case.
Social Security isn’t broken; it mainly relies on revenue generated from payroll taxes. As long as people maintain their jobs and continue contributing to the program, it should stay funded. However, there is a notable income shortage looming, primarily because a large number of baby boomers are going to leave the workforce in the coming years, and there may not be enough new workers to take their place. Consequently, once trust funds are depleted, benefit cuts could become necessary.
This situation isn’t far off either. If lawmakers manage to engage, we could be looking at significant changes in roughly ten years, as it’s been a while since Social Security was broadly reviewed.
Fortunately, there are some strategies lawmakers could consider to avert drastic cuts in benefits. Yet, one potential solution may not be very popular.
Could Lawmakers Raise the Social Security Tax?
There are several ways to boost Social Security income. Increasing the retirement age by a year or two could be one approach. This would mean workers would need to wait longer to access their monthly benefits without any reductions.
Another method is to raise the Social Security tax itself. However, that’s generally not a favored option among workers. Many people are understandably concerned about this possibility.
A recent survey from the Employee Benefits Institute found that 39% of workers are worried about an increase in the Social Security tax. That’s not surprising since many Americans feel that they already pay enough in taxes.
What Might an Increase in Social Security Tax Look Like?
Lawmakers have options regarding how to raise the Social Security tax. They could increase the tax rate or elevate the wage cap.
Currently, there’s a 12.4% tax rate for Social Security, with half taken from worker salaries and the employer covering the other half. However, self-employed individuals are responsible for the entire tax amount. It’s feasible for lawmakers to increase this rate above 12.4%, but that would certainly weigh heavily on everyone in the workforce.
On the other hand, the current wage cap is set at $176,100. This means that individuals with higher incomes aren’t contributing to Social Security on earnings above that amount. If lawmakers raise the wage cap, those higher earners would pay taxes on a larger portion of their income. In a more extreme scenario, completely eliminating the wage cap would mean that top earners would pay on every single dollar they make.
While raising or eliminating wage caps might seem appealing since it predominantly affects those with higher incomes, it presents its own kind of challenge for lawmakers to manage.
Social Security determines maximum monthly benefits based on these wage caps. Raising the caps without adjusting the benefit amounts could feel inequitable to many. Plus, there’s uncertainty about how much additional revenue these changes might actually generate.
Regardless, action is needed to prevent cuts to Social Security. Whether increasing the tax is warranted remains uncertain, yet it seems like a conversation that may need to happen soon.
