Social Security is on the verge of a major financial crunch. In the coming years, the program expects to owe more in scheduled benefits than it collects in payroll tax revenue (its primary source of funding) as baby boomers stage a mass exodus from the workforce.
Thankfully, Social Security has some cash reserves on hand to tap, known as its trust funds. But once those trust funds run dry, Social Security may have to slash benefits to the tune of about 20%.
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Recent projections have the Social Security trust funds getting depleted in 2034. Clearly, we're a ways off from there, so that estimate might change slightly in the coming years.
But all told, there's a strong chance that Social Security will have to cut benefits unless lawmakers manage to come up with a way to pump money into the program. And their go-to solution may not sit well with a lot of people.
Higher taxes could prevent Social Security cuts
One popular solution that's been introduced to prevent benefit cuts is raising the wage cap for Social Security taxes. Right now, workers only pay Social Security taxes on their first $160,200 of income. Next year, the wage cap is rising to $168,600.
But even so, that means that many high earners are only paying Social Security tax on a fraction of their income. And so it's easy to see why raising the wage cap might seem like a good idea, even if it makes some people unhappy.
Another idea, of course, is to just raise the tax rate for Social Security universally. Right now, workers are subject to a 12.4% tax rate for Social Security, and those who are salaried split that with their employers evenly. The self-employed cover the entire 12.4%.
Raising that tax rate is another option for giving Social Security the cash infusion it needs. But higher taxes are not the only option for addressing the issue at hand.
There may be a better way
Most people do not want to see their tax burden go up. This includes both higher earners and those barely scraping by on a modest income.
While raising Social Security taxes could be a good bet to prevent benefit cuts, it's not the only solution. Another thing lawmakers can do is change the timing of when seniors are allowed access to their monthly benefits in full.
Full retirement age for Social Security purposes is currently 67 for anyone born in 1960 or later. But a lot of people fall into that category. And people are generally living longer lifespans these days. So one idea that might help Social Security maintain its solvency is to push full retirement age back to 68 or 69 (or even 70), thereby compelling workers to stay in the labor force longer.
Remember, Social Security's main funding source is payroll tax revenue. So it's in the program's best interest to have people working longer.
Offering up benefits without a reduction at age 67 means that many future retirees are likely to stop working at 67. But pushing that age back could do a lot of good for the program's finances.
Of course, no solution to Social Security's financial woes is perfect. And those who aren't in favor of a delayed full retirement age will argue that it's unfair to force today's workers into a later retirement.
But the reality is that lawmakers have to do something to help ensure that Social Security is able to remain solvent and keep paying benefits to the best of its ability. And making changes to full retirement age might be the lesser of two evils when the other viable option is increasing Americans' Social Security tax burden.
