Social Security has a money problem, and it could potentially lead to benefit cuts if Washington doesn't step in soon.
The Social Security Administration (SSA) relies primarily on payroll taxes to fund benefits. However, it's currently paying out more in benefits than it's receiving in taxes, which has led to a deficit. If nothing changes, the SSA could be forced to cut benefits by around 20% by 2035.
There's a potential solution in the works, though. While no new laws have passed just yet, President Biden has a plan for how to solve one of Social Security's most pressing issues.
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Increasing the threshold for taxable income
The only alternative to cutting benefits is increasing the program's funding -- and this will likely involve raising taxes. The good news, though, is that Biden's plan will only affect the wealthiest Americans earning more than $400,000 per year.
Right now, workers must pay Social Security taxes on income up to $147,000 per year. Any income above that limit is not subject to Social Security taxes at all. Under Biden's proposal, income between $147,000 and $400,000 per year would not be taxed, but those earning more than $400,000 per year will be subject to Social Security taxes.
This plan would increase Social Security's cash flow, helping to avoid future cuts. It also has bipartisan support, which makes it more likely to pass in Congress. In fact, according to a 2022 survey from the University of Maryland, around 88% of Democrats and 79% of Republicans support this plan.
Other plans to improve Social Security
Biden's proposal isn't the only plan to make Social Security more reliable for seniors. Some lawmakers have also proposed increasing the payroll tax from 6.2% to 6.5%, which the University of Maryland expects will eliminate around 16% of Social Security's cash shortfall.
Others have raised the idea of reducing benefits for the top 20% of earners. Right now, the maximum benefit amount is $4,194 per month. If this plan were implemented, the wealthiest Americans would still receive higher monthly payments than lower earners, but they wouldn't collect as much as they do now.
A third option is to gradually raise the retirement age from 67 years old to 68, which would eliminate an estimated 14% of Social Security's shortfall. This proposal is less popular than some of the others, however, with only around 75% of Republicans and 76% of Democrats in favor of this plan.
What does this mean for you?
Right now, none of these proposals are concrete, so it's still uncertain exactly how lawmakers intend to solve Social Security's cash shortage. The SSA will continue to pay out benefits until 2035, at which point, cuts may be on the table.
If you're currently retired, there's nothing you need to do right now. But for future retirees, it may be wise to find ways to reduce your dependence on Social Security by building other sources of income in retirement.
