Social Security is a crucial income source for countless Americans, yet the program is facing significant financial challenges. In recent years, expenditures have surged beyond revenue, primarily due to the aging population growing faster than the workforce. This imbalance has implications for trust funds and accounts disbursing benefits, with estimates suggesting that the trust fund could run out by 2034.
The Congressional Budget Office predicts that, by then, one of the streams of revenue—interest from trust fund reserves—will be depleted, leaving only 77% of the scheduled payments covered. Consequently, benefits could see a reduction of about 23% in 2035 if no changes are made.
Fortunately, lawmakers in Washington have had ample time to devise solutions. There are four proposed modifications to Social Security that could avert drastic benefit cuts.
1. Extend Social Security Payroll Tax to incomes above $400,000
Currently, Social Security is mainly funded via dedicated payroll taxes, which constitute 6.2% of workers’ and employers’ wages. However, there’s a cap, with a maximum taxable income limit set at $176,100 for 2025. Any earnings above this threshold are exempt from Social Security taxes.
Given projections of a $23 trillion deficit for Social Security over the next 75 years due to shifting demographics, applying payroll taxes to higher incomes might help mitigate this gap. Research from the University of Maryland indicates that taxing income over $400,000 could effectively wipe out 60% of the anticipated funding shortfall.
2. Gradually raise the Social Security Payroll Tax Rate to 6.5% over six years
The current payroll tax is at 6.2%, but a gradual increase could alleviate long-term deficits. Increasing the rate by 0.05% each year over six years, as proposed by the University of Maryland, could cover about 15% of the projected funding shortfall.
Now that we’ve looked at a couple of changes, it’s essential to consider the broader picture. Essentially, there are three fundamental approaches to address Social Security’s financial issues: increasing revenue, cutting costs, or a blend of both. The strategies so far have focused on boosting revenue, while others might involve reducing benefits—though such cuts would be less glaring than the sweeping 23% reduction looming post-trust fund depletion.
3. Gradually increase the full retirement age to 68 by 2033
Currently, workers can access retirement benefits at age 62. However, full benefits—known as Primary Insurance Amount (PIA)—are only accessible at the Full Retirement Age (FRA), which is 67 for those born after 1960. If individuals claim before reaching FRA, they will receive less than the total PIA.
Raising the FRA to 68 by 2033 could mitigate the long-term deficit. This change would affect workers born after 1965.
4. Reduce benefits for retired workers in the top income bracket
Social Security benefits are calculated based on two percentages, adjusting based on the income from the highest 35 years of work. To determine the PIA, inflation is factored in and converted to a monthly average known as Average Indexed Monthly Earnings (AIME).
Adjusting the second bend point in the formula could ease some of the long-term funding issues by lowering benefits for high-income earners. Research shows that cutting the profits for individuals in the top 20% of earners could alleviate around 11% of the funding shortfall.
Overall, implementing these four proposed changes could eliminate 101% of the projected $23 trillion funding gap, helping to avert major benefit reductions expected in 2035.
