How Will Social Security Be Funded in the Future?
Without congressional action, current projections indicate Social Security will pay only 78% of benefits starting in late 2032. This funding gap highlights our growing disparity between workers paying into Social Security and retirees receiving benefits. Now that we know why Social Security’s solvency is under question, the next question is: what can we do to fix it?
In this week’s Money Wisdom Question Series, Heath Grossman, CFP® shares some of the current legislative proposals that might help restore the program.
1. Raise Payroll Taxes
One potential solution that lawmakers are proposing is raising payroll taxes. Payroll taxes are what primarily fund the Social Security trust fund today. The current proposal is to gradually increase the current 12.4% payroll tax, which employees and employers divide evenly. This could potentially add more baseline revenue into the trust fund.
2. Remove or Raise the Payroll Tax Cap
Another proposal is to remove or raise the payroll tax cap. Employees currently pay Social Security payroll taxes only up to a certain income limit, which is $184,500 in 2026.
That means someone who earns below that limit pays payroll taxes on 100% of their income. Someone who earns above the cap does not pay Social Security payroll taxes on any income above that amount. Raising or removing the cap would require higher earners to contribute more to the system.
3. Increase the Retirement Age
Third, lawmakers could increase the full retirement age, which has been done before. One option would be to gradually raise the full retirement age beyond 67 for future retirees.
While this approach could help account for longer average life expectancies, it could also ultimately reduce benefits for future retirees who would need to wait longer to receive their full payout.
4. Reduce the Cost-Of-Living Adjustment (COLA)
Lawmakers could also reduce the cost-of-living adjustment (COLA). By changing the inflation metric used to calculate annual benefit increases, it could result in lower adjustments over time. A lower COLA would slow the compounding growth of Social Security payouts, which could help reduce the program’s long-term costs.
5. Means-Test Benefits for Higher Earners
Finally, one other proposal is to means-test retirees’ benefits. Right now, your earnings history and age at claiming largely determine your Social Security benefit. Your income and other assets generally do not determine whether you receive your benefit.
Under a means-testing approach, individuals above certain income or asset thresholds would receive a reduced benefit. They could also receive no benefit at all under this type of proposal. While not especially popular, this is an idea in the current discussion of addressing Social Security’s funding challenges.
