Please ensure Javascript is enabled for purposes of website accessibility

Could a $15 Minimum Wage Save Social Security?

By Maurie Backman - Feb 24, 2021 at 5:49AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Raising the minimum wage does more than just help low-income workers -- it could also prevent Social Security from having to cut future benefits.

Lawmakers are fighting to raise the minimum wage to $15 an hour as part of a whopping $1.9 trillion coronavirus relief bill. The hope is that in doing so, it will lift more families out of poverty and give them an opportunity to reach a place of financial stability. The current proposal in the works wouldn't boost the minimum wage overnight, but rather, gradually increase it to $15 (up from $7.25) by 2025.

But while a more robust minimum wage would no doubt work wonders for a lot of households, it could also serve a secondary purpose that's extremely important -- saving Social Security.

More revenue for a crucial program

Social Security gets the bulk of its revenue from payroll taxes. In the coming years, however, that revenue stream is expected to decline as baby boomers leave the workforce in droves and too few replacement workers enter it. The situation is so dire that Social Security may need to slash benefits within 15 years if lawmakers don't intervene and find a way to pump more money into the program.

Four Social Security cards resting one on top of another

Image source: Getty Images.

A minimum wage hike, however, could achieve the latter goal.

Workers pay a 12.4% Social Security tax on wages of up to $142,800 this year (that wage cap typically increases from year to year). Those who are self-employed pay the full 12.4% tax, while those who are considered employees of another company or entity pay half of that 12.4% and their employers pay the remaining half. President Biden is also considering implementing a 12.4% Social Security tax on earnings above $400,000, but so far, that's not officially on the table.

If the minimum wage is increased, workers and employers alike will begin to pay more in Social Security tax. That could, in turn, provide a lot more revenue for Social Security in the coming years, thereby shoring up its finances and potentially minimizing or preventing future benefit cuts.

Of course, raising the minimum wage could also put a lot more workers in a position where they collect a higher monthly retirement benefit. Social Security benefits are earnings based and are calculated based on workers' 35 highest-paid years of wages. As such, if someone who normally makes $7.25 an hour begins making $15 an hour instead, that could, down the line, translate into a lot more retirement income courtesy of Social Security.

It's estimated that a $15 minimum wage would put more money into roughly 32 million American workers' pockets. That could, in turn, result in an additional $107 billion in revenue for Social Security.

Though a minimum wage hike has been lobbed into the massive coronavirus relief package lawmakers are trying to pass, it could still get cut before that bill is finalized. But if it does go through, it could help millions of Americans better cover their living expenses, all the while setting them up for a more secure retirement. Just as importantly, it could be just the thing that helps prevent Social Security from cutting benefits and hurting the millions of seniors who rely on it as their main source of income.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.