If Social Security needs more money, raise Social Security payroll taxes so that the program can keep paying out the promised benefits.
Is this a fair way to fix the system?
This is an effective, and pretty intuitive, option. Payroll taxes can be raised in order to cover Social Security costs. Currently, the tax rate is 6.2 percent for both employee and employer, totaling 12.4 percent. A Gallup poll found that half of Americans would be in favor of raising taxes in order to fund Social Security, if the alternative was reducing benefits. This is a consistently popular solution in various polls about how to fix Social Security, since research shows that gradually raising the payroll tax by just 2 percent would be enough for Social Security to be solvent for the next 75 years. The problem is that while payroll taxes would increase, there wouldn’t be an increase in benefits (as in everyone would just be getting the promised benefits, not more than that) as a result. Unsurprisingly, raising everyone’s taxes is not a popular idea among most politicians.
But raising the Social Security payroll tax isn’t the only way to raise the system’s revenues. The Social Security tax only applies to income earned below a certain threshold—this year, it’s $118,500. So it would fall to politicians to consider raising that cap, or eliminating it entirely.
If getting rid of the earnings cap would keep Social Security fully funded, politicians should just do that.
But will enough politicians get on board?
As wealthy Americans continue to get wealthier, a bigger share of their wages is escaping the Social Security tax. So, one proposed solution is to get rid of the cap and keep the 12.4 percent payroll tax rate, which would mean an estimated $100 billion more taxes a year for the wealthy, who currently pay a smaller proportion of their income into Social Security compared with poorer families. Simply put, this would close the current funding gap.
There are, of course, critics against raising the cap, because having a higher cap (or getting rid of it) means that the top earners in the country will pay more into Social Security. Conservatives opposed to raising taxes hold the same argument for Social Security taxes, namely that eliminating the cap would hurt GDP and economic growth generally and that wealthy Americans are already paying more income taxes. Others argue that this means in the future when those high earners retire, simply getting rid of the cap wouldn’t completely solve the problem.
Let’s change the Social Security benefits formula to reduce the size of payouts. Or raise the retirement age. Or change the cost-of-living adjustment.
These options are technically possible, but would Americans accept any of them?
Cutting benefits by 17 percent would solve the problem for the next 75 years, but it would short-change current retirees who are counting on what they were promised. Not to mention, they’d be getting less than they put in. If nothing is done, Social Security can still pay out 79 percent of the promised benefits. Reducing benefits is one of the most unpopular options, partly because it has a greater impact for low- and middle-income families, who, unlike wealthy families, may not have as much in the way of retirement savings. Moreover, a reduction in benefits would likely reduce public support for Social Security because it would probably lead people to question the fairness of the program.