Social Security Faces 22% Cut, but Lawmakers Have at Least 3 Viable Options for Sparing Retirees
A looming Social Security funding crisis threatens to reshape retirement for millions of Americans, and the fixes lawmakers are weighing each carry consequences that could hurt workers just as much as the cuts they aim to prevent.
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There are many older Americans today who would not be able to cover their expenses without Social Security. And for people who rely heavily on those benefits, a giant cut could be catastrophic. But sadly, that’s a reality many retirees might soon face.
Social Security is grappling with a serious funding shortfall. The program gets most of its revenue from payroll taxes, but a shrinking labor force is stripping Social Security of the money it needs to keep up with benefit payments.
Once Social Security’s trust fund runs dry, benefit cuts could be inevitable. And in their latest report, the Social Security Trustees projected that a 22% benefit cut could be coming as soon as late 2032.
The good news in all of this is that lawmakers have at least three viable options for preventing benefit cuts. The bad news is that each potential solution comes with drawbacks.
Here’s what those options look like and why none are a perfect solution.
1. Raising the Social Security payroll tax rate
Right now, Social Security’s payroll tax rate is 12.4%. Workers pay a 6.2% tax rate on a certain amount of income, while employers match that 6.2% tax. Those who are self-employed, however, pay the entire 12.4% themselves.
Congress could vote to raise the 12.4% Social Security tax rate to a higher number. Doing so would bring more revenue to the program in a direct manner.
The downside, though, is that higher taxes would place a huge burden on cash-strapped Americans. And since employers share in that tax burden, an increase could have other consequences, like reduced workplace benefits to compensate for the added cost.
2. Raising the Social Security wage cap
Workers don’t necessarily pay Social Security taxes on all of their income. Each year, a wage cap is set that limits how much earnings are taxed to fund the program.
This year’s wage cap is $184,500. That number is likely to increase in 2027 in line with wage growth.
Congress could vote to raise the Social Security wage cap to a much higher number. Or, lawmakers could do away with the cap altogether. Doing so would achieve a similar goal to raising the Social Security tax rate — pumping more money into the program.
The downside here is similar to above. Even if higher earners can absorb a tax increase, corporations will still have to pay their share. That could lead to less hiring and a decline in benefits that hurts workers across all income levels.
3. Raising Social Security’s full retirement age
Social Security’s full retirement age (FRA) is currently 67 for workers born in 1960 or later. At FRA, recipients can collect their monthly benefits without a reduction.
Congress could vote to raise Social Security’s FRA to 68, 69, or even 70. Doing so would likely keep a good chunk of workers in the labor force longer, bringing more revenue to Social Security. It would also allow the program to pay smaller benefits to people who don’t wait for a later FRA to file.
The downside is that raising FRA functions as a backdoor benefit cut. While it’s not the exact same thing as Social Security cutting benefits directly, workers who can’t extend their careers due to circumstances outside their control would lose out.
People with physical jobs, for example, might eventually run out of steam. And if they’re forced to take benefits early due to FRA being raised, they risk reduced Social Security checks for life.
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Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, and Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
