Even if you save well for your senior years, you may need your Social Security benefits to meet your retirement goals. But the program is facing a number of pressing challenges that lawmakers are running out of time to fix.
Social Security’s Old-Age and Survivors Insurance (OASI) Trust Fund is expected to run dry by 2032, according to the Congressional Budget Office. At that point, the program may only be able to pay about 77% of benefits, resulting in potential cuts.
The good news, though, is that lawmakers have different solutions they can look at to prevent Social Security cuts and improve benefits for retirees.
Raising full retirement age
Some lawmakers are proposing to move Social Security’s full retirement age up, making it so that today’s workers will have to wait longer to be eligible for their benefits without a reduction.
Full retirement age is currently 67 for people born in or after 1960. The argument is that with Americans living longer, forcing workers to wait a few more years still allows for a lengthy retirement while preserving funds for Social Security.
However, The Center on Budget and Policy Priorities says that raising full retirement age to 70 could cut average lifetime benefits for new retirees by almost 20%. That’s not so far off from the cuts the program may be looking at simply by allowing the OASI Trust Fund to run out. Therefore, the net benefit may not be enough to warrant such a change to workers’ retirement plans.
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Taxing more wages to fund the program
Social Security’s primary source of funding is payroll tax revenue. Each year, there’s a wage cap established that limits the amount of income that’s taxed for Social Security purposes. This year’s wage cap is $184,500. The cap tends to rise from year to year.
Some lawmakers have proposed lifting or getting rid of the wage cap to pump more money into Social Security. The Peter G. Peterson Foundation says eliminating the wage cap could “significantly improve the solvency of the Social Security trust funds,” decreasing the program’s long-term funding shortfall by 73%.
The problem is that Social Security has a maximum monthly benefit it pays each year that’s tied to the wage cap. If the wage cap goes away and the maximum monthly benefit isn’t increased, it’s easy to see how there would be a net gain for Social Security. But that change – asking higher earners to pay more into the program without getting more – makes the program less equitable, which may not sit well with some lawmakers.
Increasing the payroll tax rate
The current Social Security tax rate on wages up to the yearly cap is 12.4%. Workers pay a 6.2% tax while their employers pay a tax of the same amount. Those who are self-employed pay the entire 12.4% Social Security tax themselves.
Another option for fixing Social Security’s solvency issues is to increase the current 12.4% tax rate to a higher number. But that solution could burden millions of working Americans with higher taxes, which is something many might struggle to afford.
Employers would face a similar burden. It’s hard to know what sort of cuts companies might have to make if they were to see their payroll taxes go up. But this solution could impact employee benefits and wages in a number of negative ways, whether it’s reduced health benefits, fewer 401(k) matches, or broad downsizing of staff.
Imposing benefit caps on higher earners
There are some couples today who jointly receive six-figure Social Security benefits in retirement. The Committee for a Responsible Federal Budget recently proposed setting a $100,000 cap on the total benefit a couple retiring at full retirement age can receive.
The group says this change could close 20% of Social Security’s solvency gap. It could also boost benefits for the bottom 70% to 80% of recipients.
The issue with this change is similar to the problem with raising or eliminating Social Security’s wage cap without increasing benefits for higher earners. It changes the nature of Social Security, which may not sit well politically.
Changing the COLA formula
Social Security COLAs, or cost-of-living adjustments, are based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Boosting Benefits and COLAs for Seniors Act aims to change the COLA formula by tying it to the Consumer Price Index for Americans aged 62 or older (CPI-E), which may more accurately reflect the costs incurred by beneficiaries.
The Senior Citizens League reports that Social Security recipients lost 20% of their buying power between 2010 and 2024. The group says that switching over to the CPI-E for COLA calculations could lead to more meaningful raises that better help seniors keep up. The question, though, is whether Social Security can actually afford to pay larger COLAs given its current financial issues.
Bottom line
All of the above proposed changes are meant to strengthen Social Security and help ensure that the program is able to keep up with benefits that protect seniors from poverty. But it’s important to recognize that these changes could impact your finances and retirement plans in different ways.
Whether you’re already retired, nearing retirement, or just beginning your career, the best thing you can do at this stage of the game is stay informed on changes to Social Security and adjust your retirement and financial plans as needed if new rules are implemented.
Remember, none of the proposals above are finalized. And since it’s clear that most have kinks that need to be worked out, they may not be finalized for quite some time. But since the clock is ticking down on Social Security’s insolvency date, there’s a good chance that in the next few years, some sort of change will come to be.
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Author Details
Maurie Backman
Most retirees will make their Social Security claiming decision exactly once, which is why Maurie Backman has spent more than 20 years helping them understand it. She covers benefit calculations, COLA forecasts, and the policy changes that quietly reshape what retirees receive each month. Her work has appeared in Kiplinger, The Motley Fool, 24/7 Wall St., Bankrate, and U.S. News & World Report.
