A Social Security Payroll Tax Increase Could Be Coming - Why I Hope It Happens Sooner Than Later

Social Security is a critical source of income for retirees, and virtually every current worker has factored Social Security income into their retirement plan. That's why it's so important to find a financial fix to Social Security's financial woes.

A payroll tax increase is one of the most obvious ways to shore up the program's finances, but if it's going to happen, I'd rather it occur sooner rather than later. If lawmakers take action sooner, more workers can shoulder the burden, and the tax increase can be smaller.

Here's why a tax increase is likely going to happen, why acting faster could beat delaying, and what the potential problems are with increasing Social Security payroll taxes as a means of fixing Social Security.

Social Security is in financial trouble, and the deadline day is coming

The harsh reality is that Social Security is facing financial problems, and the day of reckoning is coming sooner than many people realize.

According to the 2026 Social Security Trustees' report, the Old-Age and Survivors Insurance (OASI) Trust Fund is scheduled to run dry in the fourth quarter of 2032. The OASI Trust Fund pays for retirement and survivor benefits.

If the trust fund runs out, Social Security can keep paying benefits from the revenue it collects, but won't have any reserves to draw from. Unfortunately, Social Security collects only enough revenue to pay 78% of promised benefits.

There is also a Disability Insurance (DI) Trust Fund that pays Social Security Disability Insurance benefits (SSDI benefits). If the OASI and DI trust funds were combined, which is thought by some to be likely if the OASI fund runs out, the combined trust fund would have enough money to last until 2034. At that time, Social Security could pay 83% of scheduled benefits.

This means that without action, seniors on Social Security are looking at a benefits cut between 17% and 22% in as little as six to eight years.

Two proposed fixes to Social Security's financial woes

Most seniors can't withstand a huge benefit cut, so there are multiple Social Security fixes on the table that lawmakers have considered. Two popular proposals include:

1. Raising or eliminating the taxable earnings cap
2. Increasing payroll taxes

The first proposal affects only the wealthy, but it could fundamentally change how Social Security works. The second would hit everyone, but it could preserve Social Security's current funding mechanism while also helping put the program back into a place of stability.

What would raising or eliminating the taxable earnings cap look like?

Currently, most workers pay Social Security taxes on all of their wages, while high earners pay Social Security taxes on only a portion. That's because there's a wage base limit or cap on the wages subject to Social Security tax. In 2026, the limit is $184,500. Anyone who earns above this amount does not pay Social Security tax on the excess earnings, or have the extra earnings counted when their monthly Social Security benefit is calculated.

One proposal to fix Social Security involves raising or eliminating this limit, but not increasing benefits. So, higher earners would pay Social Security tax on more of their income, but the average wage their benefits are based on would not fully account for all the income they paid taxes on. Senators Bernie Moreno (R-OH) and Elizabeth Warren (D-MA) have proposed this fix, but Social Security modeled the change and found it would close about 67% of the shortfall at best.

The Tax Foundation also warns that it would be a massive tax increase on high earners that could impact business operations and potentially cause people to engage in tax-avoidance techniques that could hurt Social Security in the long run. It would also fundamentally change Social Security, as the program is meant to be an earned benefit. In fact, its creator, Franklin D. Roosevelt, was very clear that he felt the funding mechanism would protect the program against political pressure.

What would increasing the payroll tax look like?

Increasing the payroll tax is another alternative to fixing Social Security, which requires everyone to contribute to shoring up the program's finances, not just the wealthy.

Currently, workers pay a 12.4% Social Security tax, but this obligation is split between employers and employees. For those who aren't self-employed, this means that the tax coming out of their paycheck takes 6.2% of their earnings while their company pays another 6.2%. These payroll taxes fund Social Security retirement, spousal, and survivor benefits as well as Social Security Disability Insurance.

If payroll taxes were to increase, Social Security would bring in more revenue, helping to stabilize the program and avoid the automatic benefit cuts that are coming.

The payroll tax increase needs to happen sooner rather than later

The most recent Social Security Trustees' report demonstrated that a payroll tax hike could completely eliminate the program's funding shortfalls. And if Congress made this change soon, raising the payroll tax 4.25 percentage points would cover the shortfall. While that sounds like a lot, remember that most workers have half their Social Security taxes paid for by their employers. This means that the majority of employees would see a 2.13 percentage point increase in their tax bill.

However, if the government waits to act until 2034, when the trust fund has been depleted, the necessary increase in the payroll tax would be 4.9 percentage points. With most Americans paying half, that would amount to a 2.45 percentage-point increase. Changing the tax rules sooner reduces the burden on each worker because their taxes don't increase as much. It also spreads the burden among more workers, including those who are in the early, middle, and later phases of their career. And it doesn't fundamentally change the funding stream that has kept Social Security going for decades.

Bottom line

Most fixes to Social Security will have at least some opponents. Raising the payroll tax and increasing or eliminating the cap on income that's taxed are both tax increases, and few politicians want to be known for raising taxes. But if taxes aren't increased, benefit cuts likely need to occur, either targeted ones or the automatic ones that would go into effect when the trust fund runs dry.

Benefit cuts would likely be less popular than a modest tax increase, a good portion of which is covered by employers, especially if Congress acts fast.

Ultimately, current and future retirees should plan for changes of some type that affect their finances, either while working or in retirement. Failing to do so would be one of the most surprising financial mistakes a senior could make.

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