Social Security is facing a serious cash flow problem. In the coming years, it expects to fall short on revenue, due to an anticipated mass exodus of baby boomers from the labor force.
Social Security's primary revenue source is payroll taxes. But as baby boomers stop working and paying those taxes, the program is apt to see its revenue decline -- especially as boomers simultaneously start putting in claims for benefits.
Granted, as baby boomers exit the workforce, it should clear the way for more younger workers to become gainfully employed. But the number of workers who are expected to enter the labor force isn't large enough to compensate for all of those retiring boomers.
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As such, Social Security needs to dip into its cash reserves, known as its trust funds, to keep up with scheduled benefits as its main revenue source shrinks. But once those trust funds run out of money, benefit cuts will be a real possibility. And according to the program's Trustees, we could be a mere 13 years away from seeing those trust funds depleted.
President Biden doesn't want to see benefit cuts happen, and many lawmakers agree. As such, Biden has pledged to do what he can to put Social Security on a path to solvency. But the solution of his that's most likely to work could also end up making a lot of taxpayers unhappy.
Higher earners should prepare to pay up
Biden is serious about pumping money into Social Security. And he thinks one good way to do that is to increase payroll taxes for workers earning more than $400,000 a year.
Right now, there's a wage cap in place that cuts off the payroll tax requirement at a certain level that changes every year. This year, for example, the wage cap sits at $147,000, so earnings beyond that threshold aren't subject to Social Security taxes. Next year, that cap is likely to rise.
Meanwhile, Biden has proposed imposing Social Security taxes on workers once their income exceeds the $400,000 mark. Here's how that work would.
Let's assume the wage cap stays put at $147,000, even though that won't happen. From there, workers earning between $147,000 and $400,000 would not pay any additional Social Security tax on their income. But someone earning $500,000, for example, would then pay those taxes on their highest $100,000 of income.
Will Biden's proposal work?
It's pretty clear that imposing Social Security taxes on income over $400,000 would increase the program's revenue substantially, to the point where benefit cuts could be minimized (or potentially avoided altogether if other fixes were implemented simultaneously). But taxing the wealthy is a move that could be met with a lot of backlash. And Biden may see some pushback among lawmakers on the road to moving forward with that plan.
Either way, Social Security's impending shortfall is a problem that needs to be addressed sooner rather than later. Lawmakers can't just sit back for the next decade and let the program continue to hemorrhage money without taking action. If Biden's plan comes to life, the program's problems could be solved sooner rather than later. And that's something higher earners will need to gear up for.
