Social Security's trust fund will run dry by 2032, triggering automatic 22% benefit cuts unless Congress passes reforms beforehand.
Congress is weighing several fixes, including raising the 12.4% payroll tax rate, which would reduce workers' take-home pay and raise employer labor costs.
Workers can soften the blow of potential payroll tax hikes by boosting traditional IRA or 401(k) contributions to lower taxable income.
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Social Security is a critical income stream for millions of older Americans. But the program is facing a major financial crisis.
Social Security's Old-Age and Survivors Insurance (OASI) Trust Fund is projected to run out of reserves in 2032. At that point, payroll tax revenue can still cover benefits, but not in full. Unless Congress acts beforehand, retirees could face an automatic benefit cut of roughly 22%.
A cut that size could constitute a financial shock for millions of older Americans. Many retirees depend on Social Security for a large share of their retirement income. And for some, it's their only source. A reduction that large could push many older Americans into poverty.
The good news is that Congress still has time to act and prevent Social Security cuts. The bad news is that one popular solution could come with serious drawbacks.
There's no shortage of ideas for strengthening Social Security's finances, although none of them are easy.
One frequently discussed option is raising or eliminating the wage cap for Social Security tax purposes. Today, earnings above $184,500 aren't subject to Social Security payroll tax. Requiring higher earners to pay taxes on more of their income could generate additional revenue for the program.
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Another proposal is increasing Social Security's full retirement age. Since people are generally living longer than they were decades ago, some policymakers argue that pushing back full retirement age could be a good way to reduce long-term costs for the program. It would also most likely keep people in the labor force longer, thereby generating additional revenue for Social Security.
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