Social Security is a critical source of income for retirees, and virtually every
current worker has factored Social Security income into their retirement
plan. That’s why it’s so important to find a financial fix to Social
Security’s financial woes.
A payroll tax increase is one of the most obvious ways to shore up the program’s
finances, but if it’s going to happen, I’d rather it occur sooner rather than
later. If lawmakers take action sooner, more workers can shoulder the burden,
and the tax increase can be smaller.
Here’s why a tax increase is likely going to happen, why acting faster could
beat delaying, and what the potential problems are with increasing Social
Security payroll taxes as a means of fixing Social Security.
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Social Security is in financial trouble, and the deadline day is coming
The harsh reality is that Social Security is facing financial problems, and the
day of reckoning is coming sooner than many people realize.
According to the 2026 Social Security Trustees’ report, the Old-Age and
Survivors Insurance (OASI) Trust Fund is scheduled to run dry in the fourth
quarter of 2032. The OASI Trust Fund pays for retirement and survivor benefits.
If the trust fund runs out, Social Security can keep paying benefits from the
revenue it collects, but won’t have any reserves to draw from. Unfortunately,
Social Security collects only enough revenue to pay 78% of promised benefits.
There is also a Disability Insurance (DI) Trust Fund that pays Social Security
Disability Insurance benefits (SSDI benefits). If the OASI and DI trust funds
were combined, which is thought by some to be likely if the OASI fund runs out,
the combined trust fund would have enough money to last until 2034. At that
time, Social Security could pay 83% of scheduled benefits.
This means that without action, seniors on Social Security are looking at a
benefits cut between 17% and 22% in as little as six to eight years.
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Two proposed fixes to Social Security’s financial woes
Most seniors can’t withstand a huge benefit cut, so there are multiple Social
Security fixes on the table that lawmakers have considered. Two popular
proposals include:
Raising or eliminating the taxable earnings cap
The first proposal affects only the wealthy, but it could fundamentally change
how Social Security works. The second would hit everyone, but it could preserve
Social Security’s current funding mechanism while also helping put the program
back into a place of stability.
What would raising or eliminating the taxable earnings cap look like?
Currently, most workers pay Social Security taxes on all of their wages, while
high earners pay Social Security taxes on only a portion. That’s because there’s a wage base limit or cap on the wages subject to Social
Security tax. In 2026, the limit is $184,500. Anyone who earns above this
amount does not pay Social Security tax on the excess earnings, or have
the extra earnings counted when their monthly Social Security benefit is
calculated.
One proposal to fix Social Security involves raising or eliminating this limit,
but not increasing benefits. So, higher earners would pay Social Security tax on
more of their income, but the average wage their benefits are based on would not
fully account for all the income they paid taxes on. Senators Bernie Moreno (R-OH) and Elizabeth Warren (D-MA) have proposed this
fix, but Social Security modeled the change and found it would close about 67%
of the shortfall at best.
The Tax Foundation also warns that it would be a massive tax increase on high
earners that could impact business operations and potentially cause people to
engage in tax-avoidance techniques that could hurt Social Security in the long
run. It would also fundamentally change Social Security, as the program is meant to
be an earned benefit. In fact, its creator, Franklin D. Roosevelt, was very clear
that he felt the funding mechanism would protect the program against political
pressure.
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What would increasing the payroll tax look like?
Increasing the payroll tax is another alternative to fixing Social Security,
which requires everyone to contribute to shoring up the program’s finances, not
just the wealthy.
Currently, workers pay a 12.4% Social Security tax, but this obligation is split
between employers and employees. For those who aren’t self-employed, this means
that the tax coming out of their paycheck takes 6.2% of their earnings while
their company pays another 6.2%. These payroll taxes fund Social Security
retirement, spousal, and survivor benefits as well as Social Security Disability
Insurance.
If payroll taxes were to increase, Social Security would bring in more revenue,
helping to stabilize the program and avoid the automatic benefit cuts that are
coming.
The payroll tax increase needs to happen sooner rather than later
The most recent Social Security Trustees’ report demonstrated that a payroll tax
hike could completely eliminate the program’s funding shortfalls. And if Congress made this change soon, raising the payroll tax 4.25 percentage
points would cover the shortfall. While that sounds like a lot, remember that
most workers have half their Social Security taxes paid for by their employers.
This means that the majority of employees would see a 2.13 percentage point
increase in their tax bill.
However, if the government waits to act until 2034, when the trust fund has been
depleted, the necessary increase in the payroll tax would be 4.9 percentage
points. With most Americans paying half, that would amount to a 2.45
percentage-point increase. Changing the tax rules sooner reduces the burden on each worker because their
taxes don’t increase as much. It also spreads the burden among more workers,
including those who are in the early, middle, and later phases of their career.
And it doesn’t fundamentally change the funding stream that has kept Social
Security going for decades.
Bottom line
Most fixes to Social Security will have at least some opponents. Raising the
payroll tax and increasing or eliminating the cap on income that’s taxed are
both tax increases, and few politicians want to be known for raising taxes. But
if taxes aren’t increased, benefit cuts likely need to occur, either
targeted ones or the automatic ones that would go into effect when the trust
fund runs dry.
Benefit cuts would likely be less popular than a modest tax increase, a good
portion of which is covered by employers, especially if Congress acts fast.
Ultimately, current and future retirees should plan for changes of some type
that affect their finances, either while working or in retirement. Failing to do
so would be one of the most surprising financial
mistakes a senior could make.
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