A Painful Payroll Tax Increase Could Be Coming to Save Social Security: What Working Americans Need to Know

Social Security is a critical income stream for millions of older Americans. But the program is facing a major financial crisis.

Social Security’s Old-Age and Survivors Insurance (OASI) Trust Fund is projected to run out of reserves in 2032. At that point, payroll tax revenue can still cover benefits, but not in full. Unless Congress acts beforehand, retirees could face an automatic benefit cut of roughly 22%.

A cut that size could constitute a financial shock for millions of older Americans. Many retirees depend on Social Security for a large share of their retirement income. And for some, it’s their only source. A reduction that large could push many older Americans into poverty.

The good news is that Congress still has time to act and prevent Social Security cuts. The bad news is that one popular solution could come with serious drawbacks.

Lawmakers have several ways to save Social Security

There’s no shortage of ideas for strengthening Social Security’s finances, although none of them are easy.

One frequently discussed option is raising or eliminating the wage cap for Social Security tax purposes. Today, earnings above $184,500 aren’t subject to Social Security payroll tax. Requiring higher earners to pay taxes on more of their income could generate additional revenue for the program.

Another proposal is increasing Social Security’s full retirement age. Since people are generally living longer than they were decades ago, some policymakers argue that pushing back full retirement age could be a good way to reduce long-term costs for the program. It would also most likely keep people in the labor force longer, thereby generating additional revenue for Social Security.

But perhaps the most direct solution of all is increasing the Social Security payroll tax rate itself. Currently, Social Security is funded by a 12.4% payroll tax on covered wages. If you’re an employee, you pay 6.2% while your employer pays the other 6.2%. If you’re self-employed, you’re responsible for the full 12.4% yourself.

Raising that tax rate would immediately send more money into Social Security, improving the program’s financial outlook and helping close at least part of its long-term funding shortfall. From a budget perspective, it’s one of the simplest fixes because it generates additional revenue without reducing benefits for current retirees. But it could also come with real tradeoffs.

A higher payroll tax rate could hurt working Americans

Raising payroll taxes might very well work to prevent Social Security cuts. But it would also burden workers financially.

A higher tax rate means workers will take home a smaller share of their paychecks. Even a relatively modest increase could reduce disposable income for millions of workers who are already dealing with higher housing costs, healthcare expenses, and everyday inflation.

Employers would also see their labor costs rise because they match employee payroll taxes. In response, some businesses could reduce hiring or cut headcount, be less inclined to give out raises, trim workplace benefits, or find other ways to offset those higher expenses.

Be prepared for a payroll tax rate increase, just in case

At this point, Congress hasn’t decided how it will address Social Security’s funding challenges. Lawmakers could ultimately choose a completely different mix of reforms, making a payroll tax increase only one of several possible outcomes. Still, it’s worth preparing for the possibility.

If payroll taxes eventually rise, looking for ways to reduce your taxable income could help soften the impact. Increasing contributions to a traditional IRA or 401(k) could lower your taxable income while helping you build retirement savings. Taking advantage of other tax deductions and workplace retirement benefits could also help offset a higher payroll tax rate.

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