Each year, the Social Security Trustees release a report about the state of the program's finances. This year's report wasn't exactly loaded with positive news.
In fact, the Trustees recently reported that Social Security's combined trust funds are expected to run out of money by 2034. Once that happens, current recipients could see their benefits cut, while future recipients may be in line for less money than they'd normally be scheduled to receive.
Given that many retirees today get the bulk of their income from Social Security, benefit cuts could be catastrophic. And so lawmakers are invested in finding ways to avoid having that happen.
But to prevent benefit cuts, Social Security will need to undergo some big adjustments. Here are some potential changes that could come down the pike.
1. Workers could pay a higher tax rate on their income
Right now, workers pay a 12.4% tax rate on their earnings toward Social Security. Those who are salaried pay 6.2% themselves while their employers kick in the remaining 6.2%. Meanwhile, those who are self-employed are responsible for the entire 12.4%.
To pump more money into Social Security, it's possible that lawmakers could vote to raise that 12.4% tax rate to a higher number. That would mean losing more money to taxes up front, but potentially preventing benefit cuts down the line.
2. The wage cap could be lifted
Workers don't necessarily pay Social Security taxes on all of their earnings. Each year, there's a wage cap that applies to those taxes, and income beyond that point is exempt.
Right now, the wage cap stands at $142,800. Chances are, it will rise in 2022, since it typically increases on a year over year basis.
But a modest increase won't do the trick in preventing Social Security benefit cuts. And so we could see the wage cap jump substantially rather than rise by about $5,000 like it did from 2020 to 2021.
Another option lawmakers might consider is to lift the wage cap altogether. In that scenario, workers would pay Social Security on all of their income.
3. Seniors could be means tested
Right now, Social Security eligibility isn't limited to those who need the money. Millionaire retirees can also collect benefits after having paid into the system during their working years.
But one option lawmakers have toyed with is means testing seniors and reducing or eliminating benefits for the wealthy. That could, in turn, prevent seniors who need their benefits from losing a chunk of them.
Of all of these options, means testing is probably the least likely to happen. Social Security has always been billed as a benefit to all, and changing that aspect of the program upends it to its core. But it is an idea that's been tossed around.
What's in store for Social Security?
At this point, we don't know what lawmakers will end up doing to fix Social Security's financial woes. But given the number of seniors who stand to plunge below the poverty line following a reduction in benefits, we should brace for some sort of change to the current system. Whether it's a painful one for workers to absorb is yet to be determined.