Social Security is a major source of income for millions of retired workers, but the program has a serious financial problem. In recent years, costs have increased faster than revenue because of a demographic shift created by the aging population. Consequently, the trust fund, the account that pays benefits, is on pace to be depleted within a few years.
Projections vary, but the latest estimate from the Social Security Board of Trustees says the Old Age and Survivors Insurance (OASI) Trust Fund will be exhausted by 2033. Thereafter, tax revenue, which would not be affected by the trust fund's depletion, would cover 77% of scheduled benefit payments, meaning benefits would automatically be cut by 23% across the board.
Here are four Social Security changes that would collectively prevent across-the-board benefit cuts.
Image source: Getty Images.
1. Apply Social Security's payroll tax to all income
Social Security is primarily financed with a dedicated payroll tax. Workers and employers each contribute 6.2% of wages (i.e., 12.4% total). But some income is exempt. Specifically, the maximum taxable earnings limit is $184,500 in 2026. Any income above that threshold is not subject to the Social Security payroll tax.
Importantly, Social Security is projected to run a $26 trillion deficit over the next 75 years. But the deficit could be reduced if more income was subject to Social Security's payroll tax. For instance, applying the tax to all income would eliminate 50% of the 75-year funding shortfall, according to the Committee for a Responsible Federal Budget (CRFB).
2. Raise Social Security's payroll tax rate to 13.6%
As mentioned, the Social Security payroll tax rate is currently 12.4%, split between workers and employers, meaning both parties contribute 6.2%. But a percentage of the financing shortfall would be resolved if the payroll tax rate were higher. For instance, increasing the payroll tax rate to 13.6% -- meaning employees and employers would each contribute 6.8% -- would eliminate 31% of the 75-year funding deficit, according to CRFB.
Importantly, there are basically three ways to resolve Social Security's financial problems: (1) increase revenue, (2) reduce spending, or (3) some combination of those changes. The changes discussed so far would bring in more revenue. The next two changes would cut benefits, but they are more targeted than an across-the-board 23% reduction.
3. Gradually increase Social Security's full retirement age (FRA) to 68 years old
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 who claims before full retirement age receives a smaller payout, meaning that person gets less than 100% of the PIA.
FRA is currently defined as 67 years old for workers born in 1960 or later, but increasing that figure would eliminate a portion of the long-term deficit. For instance, gradually raising FRA to 68 years old over a period of 24 years (i.e., FRA would increase by one month every two years) would eliminate 12% of the 75-year funding shortfall, according to CRFB.
4. Reduce Social Security benefits for workers with income in the top 20%
Social Security benefits are determined as a percentage of three bend points. Specifically, income from the 35 highest-paid years of work is adjusted for inflation and converted to a monthly average known as average indexed monthly earnings (AIME) amount. The AIME is then run through a formula that uses bend points to determine the PIA for each worker.
The dollar amounts associated with each bend point are adjusted annually to account for changes in the average wage. The formula currently works like this: Social Security benefits equal 90% of AIME up to the first bend point plus 32% of AIME between the first and second bend points plus 15% of AIME above the third bend point.
Only about 20% of the population earns enough money to be impacted by the third bend point, and lowering AIME percentage that passes through that bend point would resolve a portion of the funding shortfall. For instance, if only 5% of AIME above the third bend point translated into Social Security benefits, the 75-year funding deficit would be reduced by 9%, according to CRFB.
Here is the big picture: The four changes discussed here would collectively reduce the long-term funding deficit by 101%, meaning the Social Security Trust Fund would not be depleted at any point in the next 75 years.
