Key Points
If you’ve been hearing rumors that Social Security is on the verge of bankruptcy, the good news is that they aren’t true. Social Security can’t go bankrupt because it’s funded primarily by payroll taxes. So as long as people keep working and paying into the system, benefits can go out.
That said, Social Security is facing a massive financial shortfall due to a shrinking labor force. In the coming years, it will owe more in benefits than it earns in revenue. And without lawmaker intervention, Social Security may have to cut benefits by about 22% in roughly six years as its Old-Age and Survivors Insurance Trust Fund runs dry.
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Of course, benefit cuts aren’t a given, and Congress can still prevent them. In fact, lawmakers have multiple options for staving off Social Security cuts. Unfortunately, they all seem to come with pitfalls.
Raising taxes for Social Security
One of the simplest ways to avoid Social Security cuts may be to raise taxes. Currently, workers pay into Social Security at a rate of 6.2% on up to $184,500 of wages that’s matched by their employers. Raising that 6.2% rate, or raising or eliminating the $184,500 wage cap, could lead to more revenue for the program.
But higher taxes burden working Americans and corporations. Even if Congress were to lift the wage cap and impose higher taxes on strong earners, there would be an employer obligation to cover those taxes as well. Companies might then need to reduce hiring or workplace benefits to make up for higher payroll costs, leading to broad economic consequences.
Raising full retirement age
Full retirement age is when seniors can collect their Social Security benefits without a reduction. It’s currently 67 for those born in 1960 or later.
Congress can raise full retirement age so that future Social Security recipients can only get their benefits in full at 70 (or another age). By keeping people in the workforce longer, Social Security gets to collect more payroll taxes. And by keeping full benefits out of reach longer, Social Security can conserve more resources.
The drawback, of course, is that raising full retirement age functions like a benefit cut. For many people, waiting until age 70 to claim Social Security may not be possible. Those who are forced to file for benefits earlier — particularly people in physical work who can only do their jobs for so long — risk getting stuck with smaller checks for life.
Taking benefits away from the rich
Another potential solution for preventing Social Security cuts is to limit benefits for wealthy retirees or take them away altogether. Otherwise known as means testing, the argument behind it is that high-income retirees don’t need their benefits per se, so reducing those checks frees up more money for low-income seniors who can’t survive without Social Security.
The problem is that this proposal changes the nature of Social Security. Social Security is earned by paying into the system, not by being poor. Means testing penalizes retirees who have saved diligently all of their lives. And if it’s implemented, it could discourage future savings efforts.
Social Security isn’t doomed to benefit cuts. But while Congress has different options to remedy the situation, it’s important to recognize that no single solution available is perfect or easy.
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