Social Security benefits play a major role in retirement for many older Americans, but there could be big changes on the horizon.
Currently, Social Security is facing a cash shortfall. The program is paying out more in benefits than it's receiving from taxes and other sources of income, and if lawmakers don't find a solution soon, seniors could see a 20% reduction in benefits by 2035.
Washington hasn't settled on a solution just yet, but there are a few proposals on the table. Here are a few of the suggestions lawmakers have in mind.
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1. Increase taxes for the wealthy
Social Security benefits are funded primarily through payroll taxes. Workers pay into the program now, and that money is paid out to current retirees in benefits.
Right now, though, those taxes aren't enough to pay out benefits in full. To cover the deficit, the Social Security Administration has been dipping into its trust funds. These trust funds will provide enough cash to pay out benefits in full until 2035, at which point payroll taxes will only cover around 80% of projected benefits.
One solution, though, is to start taxing income above $400,000 per year for Social Security purposes. Currently, only income up to $160,200 per year is subject to Social Security taxes. Wealthy workers paying more in taxes will increase the program's income and provide more cash that can be paid out in benefits once the trust funds are depleted.
This is one of the most popular potential solutions, with around 81% of voters across political parties supporting this plan, according to a 2022 survey from the University of Maryland.
2. Raise the full retirement age
Your full retirement age (FRA) is the age at which you'll receive the full benefit amount you're entitled to based on your earnings record. While your exact FRA will depend on your birth year, everyone's will fall between the ages of 66 and 67.
Some lawmakers, though, have proposed raising the FRA anywhere from age 68 to 70. If this proposal were to take effect, older adults would have to wait longer to receive their full benefit amount.
That, in turn, would decrease the amount the average retiree receives in benefits over a lifetime, reducing Social Security's expenses. With this proposal, you would still receive your usual benefit amount, but you'd need to wait longer to collect it.
3. Increase the payroll tax
Another potential way to increase Social Security's funding is to increase the payroll tax itself from 6.2% to 6.5%.
This would affect all tax-paying Americans, and it would help boost Social Security's funding so that it can afford to pay out more in benefits.
Of all of these potential solutions, though, this is the least popular, with only 73% of registered voters approving of this plan. It would also have a relatively minor effect on Social Security's financial situation, only eliminating around 16% of the cash shortfall, according to estimates from the University of Maryland.
4. Reduce benefits for high earners
Finally, a fourth potential solution is to reduce benefits for the top 20% of earners. It's unclear exactly how much high earners' benefits would be reduced, but they would still receive larger payments than lower earners; the gap would just be smaller.
This proposal would decrease the amount Social Security has to pay out, leaving more money to go toward other beneficiaries. While this is one of the more popular solutions, with 81% of voters supporting it, it would only eliminate an estimated 11% of the shortfall.
When will these changes take effect?
To be clear, none of these potential solutions have become law yet, and Congress is having trouble agreeing on any plans. It's uncertain whether Washington will implement any of these options, but it will likely take multiple solutions to solve Social Security's financial problems.
The most effective of these four strategies is taxing income above $400,000 per year, but even that plan will only eliminate around 61% of the shortfall. It's likely, then, that retirees will see multiple changes to the program in the coming years to avoid benefit cuts.
Regardless of what Washington decides, the clock is ticking. The closer we get to potential benefit cuts in 2035, the more pressure lawmakers will be under to find some sort of solution. Until then, it's wise to simply stay informed to see how these changes could affect your retirement.
