Will Lawmakers Increase Social Security Taxes? 39% of Workers Worry About It.
At this point, you may have heard the rumor that Social Security is on the verge of going broke. But thankfully, that's completely false.
Social Security can't go broke because it gets the bulk of its revenue from payroll taxes. So, as long as people continue to hold down jobs and pay into the program, it can continue to get funded.
That said, Social Security is facing a serious revenue shortfall as baby boomers stage a mass exodus from the U.S. labor force in the coming years, and an inadequate number of replacement workers come in. Social Security can use the money in its trust funds to keep up with benefit payments as needed. But once those trust funds are emptied, Social Security may have to cut benefits.
And it's not like that scenario is decades away. We could be roughly 10 years from seeing Social Security slash benefits broadly if lawmakers don't manage to intervene.
Thankfully, lawmakers do have solutions they can employ with the goal of preventing a broad reduction in Social Security benefits. But one popular solution could come with a world of backlash.
Could lawmakers increase Social Security taxes?
There are a number of different steps lawmakers could take to boost revenue for Social Security. One is to move full retirement age up by a year or two so that workers have to wait longer to collect their monthly benefits without a reduction.
Another option is to raise Social Security taxes. But that's not something workers want. And not surprisingly, they're very concerned about lawmakers going down that road.
In a recent survey by the Employee Benefit Research Institute, 39% of workers said they're worried about increased taxes for Social Security. That's understandable, given that many Americans feel tax-burdened to begin with.
What increases in Social Security taxes could look like
Lawmakers have a couple of choices for raising Social Security taxes. First, they could increase the Social Security tax rate. Or, they could raise the Social Security wage cap.
Currently, workers pay a 12.4% tax rate for Social Security purposes. Of that, half comes out of their paychecks, and their employers pay the rest. People who are self-employed, however, must cover the entire 12.4% Social Security tax.
It's possible for lawmakers to opt to raise that tax rate to a number that's higher than 12.4%. If so, it would pretty much burden every member of the workforce with heftier taxes.
Meanwhile, Social Security's wage cap currently sits at $176,100, which means workers with higher incomes don't pay into the program beyond that earnings threshold. If lawmakers were to raise the wage cap, higher earners would pay Social Security taxes on more of their income. And if lawmakers were to eliminate the wage cap completely, higher earners would pay into Social Security on every dollar they earn.
It might seem like raising or getting rid of the wage cap is the better solution, since it would only impact higher earners. But this option introduces a conundrum that lawmakers might struggle to manage.
Social Security pays a maximum monthly benefit based on the wage cap. It wouldn't be equitable to raise the wage cap without also increasing the program's maximum benefit. But in that case, it's unclear how much revenue the program would net.
Either way, lawmakers do need to do something to prevent Social Security cuts. Whether that means raising Social Security taxes is still up in the air. But it's a change that workers may unfortunately have to brace for.
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