Social Security’s Financing Shortfall: 3 Congressional Fixes and Their Tradeoffs

Lawmakers have a few ways to shore up Social Security before benefit cuts begin affecting millions of retirees, but every option would likely come with a price that could show up in workers’ paychecks or retirement accounts.

If you’ve seen Social Security in the headlines lately, the news probably hasn’t been encouraging. The program is facing a significant funding shortfall that could eventually trigger a broad 22% benefit cut in about six years.

Such cuts could be devastating for the millions of older Americans who depend on those payments for income. Still, reductions are not inevitable. Congress has several choices for closing Social Security’s looming gap.

Below are three widely discussed ways to avoid benefit cuts, along with the possible impact of each.

1. Increase the payroll tax rate

Payroll taxes are Social Security’s primary funding source. Workers currently contribute 6.2% of wages up to $184,500, and employers match that 6.2% share.

Congress could raise that 6.2% tax rate for both employees and employers, creating a direct boost in Social Security revenue.

The drawback is that higher taxes would place more pressure on workers already stretched thin. Businesses could also respond to higher payroll expenses by trimming costs elsewhere, which might mean fewer jobs or reduced workplace benefits.

Workers are often encouraged to save for retirement to supplement their Social Security income. If companies scaled back 401(k) matches to help offset higher payroll costs, Americans could fall further behind in their retirement savings.

2. Raise or remove the Social Security wage cap

Workers do not pay Social Security taxes on every dollar they earn. As noted above, earnings above the $184,500 cap are exempt from Social Security taxes.

Congress could increase that cap or eliminate it altogether. Either change would bring in more money for the program by expanding the base of taxable wages.

Unlike a broad payroll tax increase, a higher wage cap would not affect as many workers. Even so, employers would still share some of the added burden, which could lead to lower corporate spending and a softer economy.

3. Raise the full retirement age

The full retirement age, or FRA, is the age at which Americans can collect their Social Security benefits in full. For people born in 1960 or later, FRA is 67.

That matters because benefits can be claimed as early as age 62, but they are reduced for every month they are taken before FRA. Those reductions can create serious financial strain later in life.

Congress could lift FRA to 68, 69, or even 70. Given longer life expectancies, supporters argue it could be a reasonable change. It could also keep more people working longer, which would generate additional payroll tax revenue for Social Security.

The downside is that some workers simply cannot stay on the job longer. People in physically demanding occupations, for instance, may not be able to delay retirement by several years. If they are pushed to claim benefits early, the long-term financial hit could be significant.

In the end, lawmakers have multiple ways to deal with Social Security’s financial troubles. But the most commonly discussed solutions each come with tradeoffs that are hard to ignore, which means Congress will need to weigh them carefully before acting.