Social Security has a revenue problem to grapple with -- and soon. In the coming years, the program expects to owe more in scheduled benefits than it collects in revenue. Those benefits can continue to be paid until Social Security's trust funds run out of money, but once that happens, which may be as early as 2035, benefit cuts could be on the table.
But a widespread reduction in benefits could be catastrophic. Many seniors have no other source of income but Social Security to rely on. Cutting that income source could fuel a massive poverty crisis, and that's clearly not what lawmakers want.
As such, lawmakers have roughly a decade and change to come up with a solution for Social Security's financial woes. And one proposal has been gaining traction. But it's a proposal that may not sit well with taxpayers at all.
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Workers could see their taxes go up
Social Security's primary source of funding is payroll-tax revenue. Currently, wages of up to $160,200 are taxed at a rate of 12.4%. Salaried employees split that burden with their employers, while the self-employed cover their Social Security taxes on their own.
Some lawmakers are proposing to raise the Social Security tax rate beyond 12.4%. Doing so would, in turn, put the burden of pumping more money into Social Security on all taxpayers, not just the wealthy. So it's easy to see why that solution may be far from popular among working Americans.
A lot of people already struggle to make ends meet between financial obligations and the taxes they pay. Increasing the Social Security tax rate could especially put an undue burden on lower earners.
Another option is to raise or even eliminate the wage cap for Social Security tax purposes. That cap changes annually based on inflation. In 2023, it's $160,200, but last year, it was $147,000.
Even if that cap continues to climb, the reality is that there are plenty of workers who earn well above it. Forcing them to pay taxes on more of their wages is another solution -- one that would burden lower and moderate earners to a lesser degree.
There's no perfect answer
At the end of the day, lawmakers aren't going to make everyone happy with regard to shoring up Social Security's finances. The program needs a windfall -- that much is clear. If Social Security continues on its current path, benefit cuts may be inevitable. The reality is that lawmakers are going to have to decide who will mostly bear the burden of pumping money into Social Security.
Some people will say that lawmakers should put the onus on the rich since they have the means. But let's also remember that while a wage cap exists, so does a maximum Social Security benefit based on earnings. To raise the wage cap without raising that maximum benefit wouldn't be fair. But raising the maximum benefit along with the wage cap may not offer the program much or any financial gain.
All told, there's really no easy answer to the problem at hand. But lawmakers will have to do their best to come up with a solution sooner rather than later because Social Security doesn't have that many more years until its trust funds are expected to be whittled down.
