No matter how well you’ve
prepared for retirement, you may end up needing your Social Security
benefits to cover a large portion of your expenses. That’s why it’s important to
read up on how the program works and to make sure you’re claiming your benefits
strategically.
If you file for Social Security ahead of your full retirement age, your monthly
checks will be reduced. But even if you file for Social Security on time, due to
a pending financial shortfall, your benefits may be reduced anyway due to broad
cuts.
Lawmakers thankfully have solutions to prevent Social Security from having to
cut benefits broadly, and one proposal could have an outsized impact on higher-wage earners.
Social Security needs a lifeline
At this point, Social Security is able to pay retirement benefits in full. But
that could change in the coming years as the program’s Old-Age and Survivors
Insurance (OASI) Trust Fund runs out of money.
The latest update from the Social Security Trustees puts the OASI Trust Fund
depletion date as the fourth quarter of 2032. That timeline could still shift,
depending on how much revenue Social Security takes in over the next few years
and what the program’s expenses and financial obligations look like.
But all told, once the OASI Trust Fund runs out of money, Social Security may be
looking at a 22% benefit cut. The program is only expected to be able to pay 78%
of scheduled benefits based on incoming payroll tax revenue.
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Raising the wage cap has bipartisan support
Even though Social Security faces the possibility of benefit cuts in just a few
years, those cuts are not a given. If lawmakers find a way to improve the
program’s finances, benefit cuts may be preventable.
One solution that has bipartisan support is lifting the Social Security wage
cap, which currently sits at $184,500 and is likely to keep rising from year to
year. Earnings beyond the wage cap are not taxed to fund Social Security.
Both Senators Bernie Moreno and Elizabeth Warren support lifting the wage cap to
improve Social Security’s finances. That’s significant, since they represent
different political parties. The logic is that raising the wage cap could
directly pump more money into Social Security while only burdening higher
earners who may, at least conceivably, be in a better position to absorb a
larger tax bill.
An increased wage cap won’t solve the problem completely
Even though raising the wage cap might seem like a reasonable way to address
Social Security’s financial crisis, experts warn that it may not be enough. The
Tax Foundation reports that at best, getting rid of the wage cap completely
would only close 67% of Social Security’s long-term funding shortfall, making it
an imperfect solution.
Another issue is that Social Security has a maximum monthly benefit it pays
retirees that’s tied to its wage cap. If the wage cap is lifted but Social
Security’s maximum benefit does not increase, it changes the core structure of
the program.
People who pay more into Social Security are promised higher retirement benefits
in return. Changing the rule therefore changes the nature of Social Security.
Other solutions lawmakers might use
Raising Social Security’s wage cap is not the only option for preventing benefit
cuts. Lawmakers could instead raise taxes broadly for all workers.
Currently, workers pay into Social Security at a rate of 12.4% on their first
$184,500 of earnings. That 12.4% tax rate is split evenly between employers and
employees, while those who are self-employed pay the whole thing. Implementing a
broad tax hike by raising the 12.4% payroll tax rate to a higher number might do
more for Social Security’s finances than only raising the wage cap.
Lawmakers may also opt to raise Social Security’s full retirement age, which
would force younger workers to wait longer to become eligible for their benefits
in full. Doing so could help Social Security by keeping workers in the labor
force for a longer period of time, thereby adding to the program’s incoming
payroll tax revenue.
Bottom line
Social Security is one of the most important benefits for
seniors. If the program were to reduce benefits broadly, many retirees would
no doubt end up in a precarious financial situation.
With the clock ticking down toward the program’s insolvency date, lawmakers
can’t afford to wait to take action on preventing Social Security cuts. And
raising the program’s wage cap may be a solution they ultimately pursue.
However, it’s clear that simply taxing higher earners more won’t be enough to
solve all of Social Security’s financial problems. This means that workers today
may need to brace for different changes that could come down the pike, like a
broad payroll tax increase or other reforms that have an impact on their current
finances and retirement plans.
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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.
