Social Security has a serious problem. The cost of paying benefits is rising faster than revenue from taxes and trust fund interest as the baby-boom generation enters retirement. Consequently, the program has operated at a deficit in each year since 2021, and the trustees expect the problem to persist indefinitely until Congress intervenes.
That situation is slowly depleting the OASI trust fund, the source of Social Security benefits paid to retired workers, spouses, and survivors. The trustee estimate the OASI trust fund will be depleted by 2033, at which point continuing revenue from income taxes will cover 79% of scheduled benefits. That means a 21% benefit cut could be effected automatically in the next decade.
In total, Social Security faces an estimated funding shortfall of $22.6 trillion over the next 75 years. Congress is well aware of the situation, though lawmakers have so far been unable to set aside differences in political ideology to reach a solution. However, a recent survey from the University of Maryland's Program for Public Consultation (PPC) suggests a bipartisan fix is possible.
Read on to see four hypothetical Social Security changes with that could eliminate the entire long-term funding shortfall. Importantly, each change enjoys a high level of support among Republicans and Democrats.
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1. Make wages over $400,000 subject to Social Security's payroll tax
Social Security is primarily funded through a dedicated payroll tax, whereby workers and employers contriubte a collective 12.4% of employee wages. However, the income subject to taxation is capped under current law. The maximum taxable earnings limit is $168,600 in 2024, meaning any wages above that level are not taxed by Social Security.
One potential solution would apply Social Security's payroll tax to all income that exceeds $400,000. That change would theoretically eliminate 60% of the long-term funding gap, and the proposal enjoys bipartisan support among voters: 86% of Republicans and 89% of Democrats support the change, according to the University of Maryland's PPC.
2. Raise Social Security's payroll tax rate to 6.5% over six years
The Social Security payroll tax rate is currently 6.2%, such that workers and employers pay 6.2% of employee wages for a collective total of 12.4%. But one potential solution would increase the tax rate by 0.05% annually over six years, such that workers and employers would eventually pay 6.5% of employee wages for a collective total of 13%.
That proposal would theoretically eliminate 15% of the long-term funding shortfall, and it enjoys bipartisan support among voters: 87% of Republicans and 87% of Democrats support the change, according to the University of Maryland's PPC.
Importantly, the two changes discussed so far would increase revenue for the Social Security program, but the next two changes would amount to benefit reductions. Whatever modifications Congress makes to Social Security in the future, historical precedent says they will likely entail a combination of revenue increases and benefit reductions.
3. Gradually raise full retirement age (FRA) to 68 by 2033
Workers are eligible for retirement benefits at age 62, but they are not entitled to their full benefit, also known as the primary insurance amount, unless they wait until full retirement age to start collecting Social Security. For context, full retirement age is 67 for workers born in 1960 or later. Anyone than claims Social Security earlier than full retirement age has their benefit permanently reduced.
One potential solution would increase full retirement age to 68 by 2033, meaning it would impact workers born in 1965 or later. That change would theoretically eliminate 15% of the long-term funding shortfall, and it enjoys bipartisan support among voters: 91% of Republicans and 88% of Democrats support the change, according to the University of Maryland's PPC.
4. Reduce benefits for workers with income in the top 20% of the population
Social Security benefits are determined as percentage of three bend points. First, income from the 35 highest-paid years of work is indexed to account for inflation, then converted to a monthly average called the average indexed monthly earnings (AIME) amount. Second, the AIME is run through a formula that uses bend points to calculate the primary insurance amount for each worker.
One potential solution would modify the third (highest) bend point to limit Social Security benefits for workers with income in the top decile (upper 20%) of the population. That change would theoretically eliminate 11% of the long-term funding shortfall, and it enjoys bipartisan support among American voters: 92% of Republicans and 93% of Democrats support the change, according to the University of Maryland's PPC.
In closing, readers should remember the solutions I've discussed are entirely hypothetical at the present time. However, benefit cuts are inevitable without Congressional intervention, so Americans should be familiar with potential fixes so they understand the scope of Social Security's funding shortfall.
