A recent report has warned that if nothing is done to address the issue, Americans relying on Social Security could experience a 25% reduction in their monthly benefits in the years to come.
Social Security ( Photo: Peter G. Peterson Foundation )
Raising the Social Security Payroll Tax Cap
The reason for this is that the Social Security trust fund reserves could become insolvent within the next ten years. At present, workers contribute 6.2% of their wages towards Social Security, with their employers matching that contribution. However, any earnings above the income cap of $160,200 are not subject to the tax. Only around 6% of wage earners hit this limit.
By increasing the income cap to $250,000 or even eliminating it altogether, the trust fund reserves could be replenished and the program could continue to function at full capacity beyond the next decade. Doing so would also shift some of the responsibility for funding Social Security from the middle class to wealthier high-wage earners.
It is worth noting that those earning above the current cap currently pay an effective Social Security payroll tax rate of 1% or less, while those earning below the cap pay a bill that is six times higher. While some experts and lawmakers agree that increasing the Social Security payroll tax cap is the best solution to the problem, others have put forward alternative solutions.
Proposal to raise the full retirement age from 66 to 70
Another option is to increase the payroll tax rate from 12.4% to 15.6%. Alternatively, some have suggested privatizing Social Security, while others have proposed imposing a Social Security tax on business and investment income, which is currently exempt from taxation.
Overall, it is clear that a social security solution is needed to ensure that the program remains financially stable and is able to continue to support the millions of Americans who rely on it.
While there are several proposals on the table, it remains to be seen which will be adopted and whether they will be sufficient to address the issue.
