Social Security is a important source of income for millions of Americans, but the program has a serious financial problem. Costs have increased faster than revenues in recent years because the aging population is growing more quickly than the working population. As a result, the trust fund, the financial account that pays benefits, is on track to be depleted within a decade.
Specifically, the Congressional Budget Office estimates the trust fund will be exhausted in 2034. That would eliminate one source of revenue (i.e., interest earned on trust fund reserves), and the remaining tax revenues would only cover 77% of scheduled payments. That means a 23% benefit cut would be necessary in 2035.
Fortunately, the lawmakers in Washington have several years to find a better solution. Here are four Social Security changes that could prevent deep, across-the-board benefit cuts.
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1. Apply the Social Security payroll tax to income above $400,000
Social Security is primarily funded by a dedicated payroll tax, which takes 6.2% of wages from workers and employers. But some income is exempt from the payroll tax. Specifically, the maximum taxable earnings limit is $176,100 in 2025. Income above that threshold is not taxed by Social Security.
Importantly, the Social Security program is projected to run a $23 trillion deficit over the next 75 years as it's strained by shifting demographics. But the deficit could be slashed by applying the payroll tax to more income. For instance, including income above $400,000 would eliminate 60% of the 75-year funding shortfall, says the University of Maryland.
2. Gradually increase the Social Security payroll tax rate to 6.5% over six years
Under current law, the Social Security payroll tax rate is 6.2% for workers and their employers. But gradually raising that figure would eliminate a portion of the long-term deficit. For example, increasing thetax rate by 0.05% annually over a six-year period would eliminate 15% of the 75-year funding shortfall, according to the University of Maryland.
Now that I've discussed two possible changes, let's step back and look at the big picture. There are basically three ways to resolve Social Security's financial problems: (1) increase revenue, (2) reduce costs, or (3) some combination of the first two options. The changes discussed so far would increase revenue, but the next two changes would cut benefits. However, they are more subtle cuts than the 23% across-the-board reduction that would follow trust fund depletion.
3. Gradually increase full retirement age to 68 by 2033
Workers are eligible for retirement benefits at age 62, but they are not entitled to their full benefit -- also called the primary insurance amount (PIA) -- until full retirement age (FRA). Anyone that claims before full retirement age receives a smaller payout, meaning they get less than 100% of their PIA.
FRA is currently defined as 67 years old for workers born in 1960 or later, but raising the figure would reduce the long-term deficit. For instance, increasing FRA to 68 years old by 2033, meaning it would apply to workers born in 1965 or later, would eliminate 15% of the 75-year funding shortfall, according to the University of Maryland.
4. Reduce benefits for retired workers with income in the top 20%
Social Security benefits are determined as percentages of two bend points. Specifically, income from the 35 highest-paid years of work is adjusted for inflation and converted to a monthly figure called the average indexed monthly earnings (AIME) amount. The AIME is then run through a formula that uses two bend points to determine the PIA for each worker.
Modifying the second (highest) bend point would eliminate a portion of the long-term deficit by reducing benefits for high earners. For instance, the University of Maryland estimates that reducing benefits for individuals with income in the top 20% could reduce the 75-year funding deficit by 11%.
Here's the big picture: The four changes I've discussed would eliminate 101% of Social Security's $23 trillion funding shortfall, which would prevent across-the-board benefit cuts in 2035.
