How Lawmakers Plan to Close Social Security’s Funding Gap, and Which Fixes Cost You the Most
Congress is weighing fixes for Social Security's looming funding crisis, but each option comes with hidden costs that could hit your paycheck, your retirement timeline, or both.
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If you’ve seen the words “Social Security” in the news recently, it probably wasn’t in a good context. The reason? Social Security is facing a major funding shortfall. And if lawmakers don’t intervene, benefit cuts could be coming for millions of older Americans.
The good news is that Congress does have options for preventing Social Security cuts. But they’re not necessarily pretty. Here’s how lawmakers can close the program’s funding gap, and how those solutions might impact you.
1. Raising the payroll tax rate
Payroll taxes are Social Security’s main source of funding. Workers pay into the program at a rate of 6.2%, as do employers. Self-employed workers bear the entire 12.4% tax themselves.
One option for preventing Social Security cuts is to increase the payroll tax rate above 12.4%. Doing so directly gives Social Security a cash infusion.
How much might a payroll tax increase cost you? It depends on what lawmakers decide to do. But there may be a hidden cost on top of the extra taxes you end up having to pay.
If companies are forced to spend more on payroll, they could shrink workplace benefits to compensate. So a higher rate of tax to fund Social Security might also mean fewer wellness perks, higher health insurance premiums, and smaller 401(k) matches.
2. Lifting or eliminating the wage cap
Each year, there’s a cap set on the amount of wages that can be taxed to fund Social Security. This year’s cap is $184,500. But lawmakers could raise or get rid of that cap to pump more money into Social Security.
Would that cost you more money? It depends on how much you earn. If your income is well below the current wage cap, this is a change you may not feel directly.
However, as is the case with a payroll tax rate increase, there could be an indirect cost. If companies are burdened with having to match Social Security taxes on higher salaries, they might cut all sorts of benefits to make up for it.
3. Raising full retirement age
Full retirement age, also known as FRA, is when Social Security recipients can collect their benefits without a reduction. It’s 67 for anyone born in 1960 or later.
Another option for closing Social Security’s funding gap is to raise FRA. That could mean phasing in an FRA of 68, 69, or even 70 for younger workers.
The cost of an increased FRA depends on when you claim benefits. If FRA is moved to 69 and you file at 67, you could be looking at significantly smaller checks, just as claiming Social Security at 65 today versus 67 would have the same effect.
But even if you wait until whatever the official new FRA is to claim Social Security, you’re losing out on benefits by virtue of having to wait. In other words, your checks may not be slashed. But if you were counting on getting your Social Security in full at 67 and you’re forced to wait until 69, it’s a benefit cut one way or another.
All told, Congress has to start acting soon to prevent broad Social Security cuts. And unfortunately, any solution that comes down the pike could cost you to some degree.
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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.
