There's a Bipartisan Fix for Social Security - But It Comes With a Catch

No matter how well you've prepared for retirement, you may end up needing your Social Security benefits to cover a large portion of your expenses. That's why it's important to read up on how the program works and to make sure you're claiming your benefits strategically.

If you file for Social Security ahead of your full retirement age, your monthly checks will be reduced. But even if you file for Social Security on time, due to a pending financial shortfall, your benefits may be reduced anyway due to broad cuts.

Lawmakers thankfully have solutions to prevent Social Security from having to cut benefits broadly, and one proposal could have an outsized impact on higher-wage earners.

Social Security needs a lifeline

At this point, Social Security is able to pay retirement benefits in full. But that could change in the coming years as the program's Old-Age and Survivors Insurance (OASI) Trust Fund runs out of money.

The latest update from the Social Security Trustees puts the OASI Trust Fund depletion date as the fourth quarter of 2032. That timeline could still shift, depending on how much revenue Social Security takes in over the next few years and what the program's expenses and financial obligations look like.

But all told, once the OASI Trust Fund runs out of money, Social Security may be looking at a 22% benefit cut. The program is only expected to be able to pay 78% of scheduled benefits based on incoming payroll tax revenue.

Raising the wage cap has bipartisan support

Even though Social Security faces the possibility of benefit cuts in just a few years, those cuts are not a given. If lawmakers find a way to improve the program's finances, benefit cuts may be preventable.

One solution that has bipartisan support is lifting the Social Security wage cap, which currently sits at $184,500 and is likely to keep rising from year to year. Earnings beyond the wage cap are not taxed to fund Social Security.

Both Senators Bernie Moreno and Elizabeth Warren support lifting the wage cap to improve Social Security's finances. That's significant, since they represent different political parties. The logic is that raising the wage cap could directly pump more money into Social Security while only burdening higher earners who may, at least conceivably, be in a better position to absorb a larger tax bill.

An increased wage cap won't solve the problem completely

Even though raising the wage cap might seem like a reasonable way to address Social Security's financial crisis, experts warn that it may not be enough. The Tax Foundation reports that at best, getting rid of the wage cap completely would only close 67% of Social Security's long-term funding shortfall, making it an imperfect solution.

Another issue is that Social Security has a maximum monthly benefit it pays retirees that's tied to its wage cap. If the wage cap is lifted but Social Security's maximum benefit does not increase, it changes the core structure of the program.

People who pay more into Social Security are promised higher retirement benefits in return. Changing the rule therefore changes the nature of Social Security.

Other solutions lawmakers might use

Raising Social Security's wage cap is not the only option for preventing benefit cuts. Lawmakers could instead raise taxes broadly for all workers.

Currently, workers pay into Social Security at a rate of 12.4% on their first $184,500 of earnings. That 12.4% tax rate is split evenly between employers and employees, while those who are self-employed pay the whole thing. Implementing a broad tax hike by raising the 12.4% payroll tax rate to a higher number might do more for Social Security's finances than only raising the wage cap.

Lawmakers may also opt to raise Social Security's full retirement age, which would force younger workers to wait longer to become eligible for their benefits in full. Doing so could help Social Security by keeping workers in the labor force for a longer period of time, thereby adding to the program's incoming payroll tax revenue.

Bottom line

Social Security is one of the most important benefits for seniors. If the program were to reduce benefits broadly, many retirees would no doubt end up in a precarious financial situation.

With the clock ticking down toward the program's insolvency date, lawmakers can't afford to wait to take action on preventing Social Security cuts. And raising the program's wage cap may be a solution they ultimately pursue.

However, it's clear that simply taxing higher earners more won't be enough to solve all of Social Security's financial problems. This means that workers today may need to brace for different changes that could come down the pike, like a broad payroll tax increase or other reforms that have an impact on their current finances and retirement plans.

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