The Bipartisan Social Security Plan Gaining Ground Before the Midterms - Here's What's at Stake

Many older Americans today are living on just Social Security. And people in that situation tend to need every dollar in benefits they can get.

Unfortunately, Social Security benefits may be in for a serious reduction due to a pending financial shortfall. Lawmakers need to take action in the coming years to prevent sweeping cuts and avoid a scenario where countless older Americans are plunged into poverty. The Social Security Trustees estimate that the program's trust fund could run out of money by late 2032, at which point a 22% benefit cut could be on the table.

One option for shoring up Social Security's finances has been gaining bipartisan support, but it's a solution that comes with its share of drawbacks.

How Social Security's wage cap works

Social Security gets most of its revenue from payroll taxes. Some workers pay into Social Security on every dollar they earn. But for higher earners, there's a wage cap that's set every year.

This year's Social Security wage cap sits at $184,500. That cap is likely to increase next year, and in future years, in line with wage growth. But all told, the purpose of the wage cap is the same: to limit the amount of earned income that's taxed to fund Social Security on an annual basis.

Why lawmakers want to raise the wage cap

Given that Social Security is in need of a cash infusion to prevent widespread benefit cuts, lawmakers need to find the most painless path toward making that happen. And one option that's been gaining bipartisan support is lifting or eliminating Social Security's wage cap.

Senators Elizabeth Warren (D-Mass.) and Bernie Moreno (R-Ohio) recently published an op-ed calling on Congress to consider lifting the Social Security wage cap. The pair wrote, "We don't agree on everything, but here's one thing we do agree on: Congress must act now to save Social Security for generations of Americans to come."

Why some say lifting the wage cap is the best option

The reason there's so much support for raising the Social Security wage cap is simple: It seems to only impact the country's highest earners. Congress could vote to raise the Social Security tax rate, period, which currently sits at 6.2% for employees and employers, or 12.4% in total. That, too, would add a lot of revenue to the program.

But a change of that nature would burden all working Americans with higher taxes. Raising Social Security's wage cap only impacts people who, by nature, do well financially.

Why some critics say a higher or absent wage cap isn't the right call

Raising the Social Security wage cap might seem like a reasonable solution for giving the program a cash infusion. But those who think it only impacts higher earners are sorely mistaken.

As mentioned earlier, workers and employers have to equally share in the burden of paying into Social Security. If the wage cap gets raised or eliminated, it's not just higher earners who would see their taxes go up. Employers would also face higher taxes. That could lead to other unwanted consequences, like slower hiring or widespread layoffs to compensate.

The Tax Foundation also argues that raising or getting rid of the Social Security wage cap does not completely address the program's solvency crisis. It says uncapping the payroll tax would close 67% of Social Security's shortfall at best. In other words, broad tax hikes might still become necessary even if this solution is implemented.

The Tax Foundation also argues that getting rid of the wage cap could hurt the economy broadly. Benefits could start to disappear, so workers would potentially suffer financial losses in other ways, even if their taxes weren't directly increased. Finally, the Tax Foundation says that going this route would constitute the largest payroll tax increase since 1982.

Bottom line

Social Security is one of the most important benefits for seniors. Without those monthly checks, many older Americans would struggle to make ends meet.

Lawmakers have to take some sort of action to prevent Social Security cuts before the 2032 trust fund depletion deadline. And even though that deadline could wiggle a little in the coming years, the reality is that fixing Social Security's finances is something that needs to happen sooner rather than later.

As the midterms approach, Social Security is apt to be a pressing issue Americans want clarity on. This especially rings true among older voters who stand to get hurt financially if Social Security cuts happen in the near term.

But raising Social Security's wage cap is only one potential solution for preventing cuts. If Social Security is important to you, pay attention to what candidates have to say on the matter so you understand the ideas that may be coming down the pike.

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