Social Security is in trouble. In the coming years, the program expects to owe more money in benefits than it collects in revenue. And while it has trust funds it can tap to make up that difference, once those cash reserves are depleted, benefit cuts will be on the table -- and those cuts could be substantial.
Meanwhile, those trust funds could run out of money by 2035. That means benefit cuts aren't a far-off problem, but rather, one seniors might grapple with in just a little more than a decade.
One solution that's been tossed around to prevent Social Security cuts is raising the wage cap for payroll tax purposes. Payroll taxes are Social Security's main source of revenue, and right now, only $147,000 of wages are taxed per year (that figure is likely to climb in 2023). If lawmakers were to raise the wage cap or get rid of it entirely, it would allow Social Security's payroll tax revenue to increase, thereby preventing benefit cuts and helping to ensure that the program is around for many future generations.
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A big reason lawmakers may have a hard time lifting the wage cap is pushback from higher earners who don't want to lose more of their income to taxes. But there's another reason this solution may not fly, and it's one lawmakers will need to consider when weighing their options for saving Social Security from having to slash benefits.
Small businesses bear the burden, too
This year, workers are subject to taxes on their first $147,000 of wages. Those who are self-employed pay a 12.4% tax rate on those wages for Social Security purposes. But those who are salaried workers aren't responsible for that entire bill. Rather, they split it evenly with their employers.
If lawmakers were to raise the wage cap to increase payroll tax revenue for Social Security, it would result in not just higher taxes for workers, but also higher taxes for the companies that employ them. And while large corporations may be in a reasonable position to absorb those higher taxes, the same can't necessarily be said for small businesses.
Many small businesses operate with tight margins, and many also took a hit during the earlier stages of the pandemic. Burdening those companies with a higher payroll tax obligation could mean driving small businesses into the ground.
That wouldn't be good for the economy, nor would it actually help Social Security in the long run. And for that reason, we can't necessarily look to a higher wage cap as a viable solution for Social Security's impending financial shortfall.
Can anything be done?
To be clear, raising the wage cap isn't the only route lawmakers can take to pump more revenue into Social Security. Rather, it's one of many potential solutions, such as raising full retirement age and allocating benefits during retirement based on financial need. But it also happens to be a popular solution that lawmakers point to. And the fact that it has its flaws is reason enough for current and future beneficiaries alike to gear up for Social Security cuts.
