A recent report from the Congressional Budget Office (CBO) indicates that Social Security’s trust funds could run out by 2034. This situation may lead to significant cuts in benefits unless there are new ways to fund the program. However, achieving a widely accepted solution is challenging.

Some suggestions involve increasing Social Security payroll taxes. Although this would mean less disposable income for workers today and fewer savings for their futures, it’s a largely unpopular idea. Nonetheless, there’s one tax reform proposal that has garnered substantial bipartisan support.

Higher contributions from the wealthy

Typically, most employees pay Social Security payroll taxes on all their earnings, but this is not true for those with high incomes. In 2024, only the initial $168,600 of a person’s income is subject to these taxes. Any amount beyond this threshold is exempt, which also does not contribute to higher Social Security benefits during retirement.

Many feel that high-income earners should contribute more through Social Security taxes to help strengthen the program’s finances. Some have advocated for eliminating the income limit on Social Security payroll taxes entirely, thereby requiring everyone to pay the standard 12.4% tax — shared equally between employee and employer — on all earnings.

Another proposal suggests creating a “donut hole.” This would mean removing the payroll tax for incomes exceeding $168,600 (adjusted for inflation each year) while reinstating it for those earning above $400,000 annually.

For instance, under this new model, a person who earns $200,000 would only pay Social Security payroll taxes on the first $168,600. The remaining $31,400 would not incur any tax. Conversely, someone with an income of $450,000 would be taxed on the first $168,600 and the $50,000 exceeding the $400,000 threshold.

A study from the University of Maryland surveyed opinions in six pivotal swing states for the 2024 election, discovering that a significant majority favored this proposal. An impressive 87% of participants supported it, with similar levels of approval across Republicans, Democrats, and Independents. However, this doesn’t guarantee its implementation.

Impact on Social Security

This tax reform would significantly impact Social Security’s future but alone wouldn’t guarantee its long-term viability. The research indicates that it could reduce funding shortfalls by around 60%. At best, it would only postpone the problem.

For Social Security to remain stable long-term, further actions are necessary. It’s unlikely a single solution will resolve the issue. Instead, it will probably require a series of measures aimed at either boosting the program’s funding or cutting benefits given to retirees, disabled individuals, surviving spouses, and their families.

This complexity is why a definitive solution for Social Security remains elusive. The “donut hole” approach is appealing as it would not create financial strain on average wage earners. However, many other proposed solutions could have adverse effects on them.

Increasing the Social Security payroll tax rate would result in less disposable income for workers today. Suggestions to raise the full retirement age (FRA) could effectively act as a benefit cut, with more pronounced penalties for early claimants than currently exist. Reducing benefits would threaten the financial security of numerous retirees.

Finding a straightforward answer is difficult. However, the government must make decisions in the coming years. When that time comes, everyone will need to reassess their retirement plans accordingly. For now, the best strategy for workers is to save as much as possible independently, reducing reliance on Social Security in retirement.

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