Social Security’s Funding Gap: 3 Ways Congress Could Fix It (and What Each Costs You)
Congress has several ways to rescue Social Security before cuts hit millions of retirees, but each fix comes with a cost that could land directly in your paycheck or retirement savings.
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If you’ve been hearing the words “Social Security” in the news lately, the context probably hasn’t been good. Social Security is facing a major funding gap that could result in a broad 22% benefit cut in roughly six years.
Social Security cuts could be downright catastrophic for the millions of seniors who rely on those benefits for income today. Thankfully, though, Social Security cuts aren’t a given. Congress has options for fixing the program’s pending financial shortfall.
Here’s what three popular solutions to prevent benefit cuts look like, and how they might impact you.
1. Raising the payroll tax rate
Social Security’s main revenue source is payroll taxes. Workers pay into the program at a rate of 6.2% on up to their first $184,500 of wages, and employers match that 6.2% contribution.
Congress could raise that 6.2% Social Security tax rate for workers and employers. That’s a direct way to pump more money into Social Security.
The downside, of course, is that higher taxes burden workers who may be struggling to make ends meet. Higher payroll costs could also lead to corporate spending cuts, resulting in fewer jobs and reduced workplace benefits.
Workers are often advised to save for retirement so they can supplement their Social Security checks. If companies do away with 401(k) matches, for example, to offset higher payroll costs, it could set Americans back in their retirement savings.
2. Lifting the Social Security wage cap
Workers don’t automatically pay Social Security taxes on all of their earnings. As mentioned above, there’s a $184,500 tax cap, and wages above that threshold are exempt from Social Security taxes.
Congress could raise the wage cap or eliminate it entirely. Doing so achieves the same goal as a higher payroll tax rate. It gives Social Security a direct cash infusion.
A higher wage cap wouldn’t affect the workforce as broadly as a general tax hike would. But employers would still have to share in the burden of higher taxes, which could lead to reduced corporate spending and general economic sluggishness.
3. Raising Social Security’s full retirement age
Full retirement age, or FRA, is the age at which older Americans are allowed to collect their Social Security benefits in full. FRA is currently 67 for anyone born in 1960 or later.
That’s important because while the earliest age to claim Social Security is 62, benefits are reduced for every month they’re claimed ahead of FRA. A large reduction could lead to financial struggles in retirement.
Congress could raise FRA to 68, 69, or even 70. With Americans living longer, it’s a potentially justifiable change. Raising FRA could keep people in the workforce longer, thereby increasing payroll tax revenue for Social Security.
The problem is that people who are unable to work longer face self-imposed benefit cuts through no fault of their own. People in physical jobs, for example, may not be able to work a few extra years. If they’re forced to take benefits early, that hurts them financially throughout retirement.
All told, there are many options lawmakers can consider to address Social Security’s financial woes. But the most popular solutions today all come with drawbacks that are hard to overlook. Congress will have to weigh each fix carefully before moving forward.
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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, The Washington Post, 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.
