Social Security’s Challenge: Proposed Changes to Address Funding Shortfall
Social Security is facing a significant financial challenge. For almost 20 years, the program’s benefit payments have been outpacing tax revenues. Since 2021, it has been running a deficit, and without action from Congress, this trend may continue.
To put this into perspective, the projected funding gap is estimated to exceed $22 trillion by 2098. Moreover, the trust funds responsible for Social Security benefits could be depleted by 2035. Should this occur, revenue from taxes would only cover 83% of the planned benefit payments, leading to a possible 17% cut in benefits within a decade.
Despite political differences, there may be a path toward a bipartisan solution. A recent survey from the University of Maryland’s Program for Public Consultation (PPC) indicates that there are viable options to resolve this crisis without implementing significant benefit cuts. Here are four proposed changes that could effectively address the financial issues facing Social Security.
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1. Apply Payroll Tax to Income Above $400,000
Social Security funding mainly comes from a payroll tax, where employees and employers each contribute 6.2% on wages up to a taxable maximum of $168,600 in 2024. Income exceeding this limit is not taxed for Social Security.
By extending the payroll tax to income exceeding $400,000, the long-term funding shortfall could be reduced by 60%. This change is popular among voters, with support from 89% of Democrats and 87% of Republicans, according to the University of Maryland’s PPC.
2. Gradually Increase the Payroll Tax Rate to 6.5%
The current payroll tax rate stands at 6.2%, leading to a combined tax rate of 12.4% for employees and employers. A gradual increase to a rate of 6.5% over six years could lower the funding shortfall by 15%. This proposal also has bipartisan support, with 87% of Democrats and 87% of Republicans backing the change.
3. Raise Full Retirement Age to 68 by 2033
Individuals can start claiming retirement benefits as early as 62, but they must reach full retirement age (FRA) for full payouts. For those born in 1960 or later, FRA is currently set at 67. Claiming earlier leads to reduced benefits.
A gradual increase of the FRA to 68 by 2033 could cut the long-term funding shortfall by 15%. This idea is favored by 88% of Democrats and 91% of Republicans, highlighting its broad appeal among voters.
4. Adjust Benefits for Top Earners
The benefits that individuals receive from Social Security are calculated based on their average income over their lifetime, using a formula involving bend points. Currently, benefits are calculated at 90% of earnings below the first bend point, 32% between the first and second, and 15% above the second.
Modifying these percentages for the top 20% of earners to 90%, 32%, and 5% would decrease the funding shortfall by 11%. This adjustment has substantial support, with 93% of Democrats and 92% of Republicans in favor, according to the University of Maryland’s PPC.
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