Social Security remains a vital income source for a vast segment of retirees, yet the program confronts substantial financial headwinds. The systemic challenge stems from accelerating costs that eclipse revenue inflows, a direct consequence of the nation 27s shifting demographics, notably a growing elderly population. This imbalance jeopardizes the trust fund designated to fund benefits, resulting in projections that it will be exhausted in the near future.
According to the most recent analysis by the Social Security Board of Trustees, the Old Age and Survivors Insurance (OASI) Trust Fund is on track to run out of reserves by 2033. Once the trust fund is depleted, Social Security will rely solely on ongoing tax revenues to finance benefits. However, these revenues are forecasted to cover only 77% of scheduled benefit payments, implying an effective automatic reduction of 23% across the board unless policy changes are enacted.
Addressing this impending shortfall requires adjustments that either enhance revenue, diminish expenditures, or employ a combination of both strategies. Experts have identified four possible modifications that, when implemented together, could prevent the across-the-board benefit cuts projected post-2033.
1. Expanding Payroll Tax Coverage to All Earnings
The core funding for Social Security is generated via a dedicated payroll tax system. Both employees and employers contribute 6.2% of earnings each, amounting to a total of 12.4%. However, a ceiling exists for taxable income, set at $184,500 in 2026, beyond which no payroll tax is assessed. This cap excludes a segment of higher income from contributing to Social Security, limiting potential revenues.
The program faces a projected $26 trillion deficit over the next 75 years, underscoring the need for substantial fiscal remediation. Increasing the scope of taxable earnings to encompass all income, regardless of amount, could eliminate approximately half of this 75-year shortfall. This estimate is supported by analyses conducted by the Committee for a Responsible Federal Budget (CRFB).
2. Raising the Payroll Tax Rate to 13.6%
Currently set at 12.4% combined, with an even split between employees and employers, the payroll tax rate contributes significantly to Social Security funding. Elevating this rate modestly to 13.6% (split as 6.8% each from employees and employers) is projected to reduce the long-term deficit by nearly one-third, according to CRFB calculations.
This adjustment reflects another revenue-centered approach aimed at bolstering the financial foundation of the program, increasing inflows without altering benefit structures.
3. Incrementally Delaying the Full Retirement Age to 68
Currently, individuals may begin claiming Social Security retirement benefits at age 62, but full benefits are reserved for those reaching the Full Retirement Age (FRA). For beneficiaries born in 1960 or later, FRA is set at 67 years. Claiming benefits prior to FRA results in a reduced payout relative to the primary insurance amount (PIA).
A gradual increase of the FRA to age 68 over a 24-year period (by adding one month every two years) is proposed as a means to address the deficit partly. According to CRFB, this strategy could diminish the 75-year funding gap by 12%. This measure represents a method of curtailing expenditures that selectively affects timing and benefit amounts without imposing uniform percentage cuts.
4. Adjusting Benefits for Higher-Income Earners
Social Security benefits derive from calculating the average indexed monthly earnings (AIME) based on a worker 27s top 35 earning years, adjusted for inflation. The benefit formula applies different percentages to portions of AIME delineated by bend points: 90% on income up to the first bend point, 32% on income between the first and second bend points, and 15% on earnings above the third bend point.
Only about 20% of beneficiaries earn enough to have income affected by the highest bend point. Reducing the benefit percentage applied to income above this threshold—for example, lowering it to 5%—could shrink the extended funding shortfall by 9%, as assessed by the CRFB.
This approach targets spending reductions more acutely, affecting benefits for higher earners rather than applying across-the-board cuts.
Overall Impact and Outlook
Integrating these four proposals could collectively erase the entire projected long-term funding deficit for Social Security, according to the Committee for a Responsible Federal Budget. Such a combined strategy would ensure the trust fund remains solvent throughout the forthcoming 75-year period, thus maintaining scheduled benefit levels without necessitating broad reductions.
These reform options highlight the complex balance policymakers face between increasing program revenues and modifying benefit structures to secure Social Security 27s financial sustainability.