5 potential solutions to keep Social Security from going broke
Social Security, a financial lifeline for millions of Americans, faces a projected funding shortfall in just over a decade.
According to the 2024 Social Security and Medicare Board of Trustees annual report, the program will be unable to pay full benefits by 2035 without legislative action. If no action is taken, future retirees may receive just 83 percent of their benefits.
The 2035 go-broke date is slightly farther in the future than last year’s report, thanks to a strong labor market and more workers paying into the system via payroll taxes. Still, the annual trustee report warns that postponing a crisis isn’t the same as solving it.
Finding a solution to ensure the program’s long-term solvency is critical for the estimated 67 million Americans who rely on Social Security — and for future generations.
5 proposed solutions to fix Social Security
Shoring up the projected shortfall of the Social Security trust fund isn’t a one-size-fits-all solution. Numerous proposals have been discussed over the years, some more controversial than others.
Here’s a breakdown of the most common solutions floated by lawmakers and thought leaders, the pros and cons of each option, and the level of traction — if any — it’s received in Congress.
Raising payroll tax on workers and employers
This proposal involves raising the payroll tax rate for Social Security, which is currently 6.2 percent for the employer and 6.2 percent for the employee, or 12.4 percent total.
This common-sense approach is supported by some economists and lawmakers. A modest increase spread across a larger workforce could generate significant revenue.
If payroll taxes were raised immediately by 3.61 percent – about 1.8 percent each for the employee and the employer – the government could pay scheduled Social Security benefits through 2097, with a one-year reserve at the end, according to research from the Center for Retirement Research at Boston College.
But raising taxes is always unpopular. The regressive nature of the payroll tax — a higher percentage of income for low earners — is also a concern.
Several proposals have been introduced in recent years to increase the payroll tax. Some call for a small, gradual approach, such as raising the tax by 0.1 percent each year from 2029 through 2048, until the rate reaches 14.4 percent in 2048. However, none of the proposals have made it to a vote in the House or Senate.
The last time the Social Security payroll tax rate increased was over 30 years ago in 1990, according to the Tax Foundation.
Subjecting more wages to payroll taxes
Currently, only wages up to a certain amount ($168,600 in 2024) are subject to the 12.4 percent Social Security payroll tax. This proposal would eliminate the cap, taxing all wages.
Supporters say it would generate significant revenue without placing a heavy burden on low- and middle-income earners.
Opponents, including some Republican lawmakers, argue it’s a tax increase on the wealthy who would get little personal benefit from the tax hike. Additionally, it might disincentivize high earners from working longer.
Numerous proposals to increase or eliminate the wages cap have been introduced by members of Congress over the last decade, but none have gained significant traction.
Gradually raising the retirement age
The full retirement age, or the age at which people become eligible for full Social Security benefits, is currently 67 for those born in 1960 and later. This proposal suggests raising it to age 70 for future workers, phasing in the change over a number of years.
Since Social Security was enacted, the average life expectancy in the U.S. has increased from 62 to about 77 years, and people tend to be healthier at older ages.
The Social Security Administration itself has acknowledged raising the retirement age as a potential solution. The American Academy of Actuaries estimates this proposal could rectify about 68 percent of Social Security’s insolvency.
However, raising the retirement age could be challenging for physically demanding jobs or for people with lower life expectancies. It could also force people to rely on savings or work longer, potentially impacting low-wage earners the most. And considering that many Americans claim Social Security as early as possible, at age 62, raising the full-retirement age may not incentivize enough people to work longer.
One proposal from the Bipartisan Policy Center in 2016 recommends increasing the full retirement age one month every two years until the full retirement age increases from 67 to 69. At the same time, the age at which people can claim the delayed retirement credit — one of the primary ways workers can maximize their monthly Social Security check — would increase from age 70 to 72.
The last time Congress increased the Social Security full retirement age was in 1983, when lawmakers voted to bump it from 65 to 67 over time. Proposals for raising the full retirement age haven’t been seriously considered recently.
Reduce benefits for those with higher retirement income
This option preserves benefits for those who need them most while reducing them for those with access to other sources of income.
A couple with total retirement income of $70,000, including investment earnings, would lose 30 percent of their Social Security benefit under the proposal, according to the American Academy of Actuaries. Retirees with more than $120,000 in income would lose 85 percent of benefits.
The American Academy of Actuaries estimates this move could generate enough revenue to cover about 75 percent of Social Security’s insolvency.
But the idea would likely face intense criticism. It would shift Social Security from a universal program to a needs-based program, which could lessen the sacrosanct support Social Security currently enjoys.
Additionally, some people might try to avoid paying taxes if they didn’t get anything in return — like a meaningful benefit check in retirement.
There haven’t been concrete proposals for direct benefit cuts, though some lawmakers have discussed means-tested modifications that could indirectly reduce benefits for wealthier retirees.
Invest a portion of the Social Security trust fund in stocks
Instead of investing Social Security trust funds in special Treasury bonds, which have a relatively low rate of return, some lawmakers have proposed creating a new trust fund that invests in stocks or passive index funds to help generate higher returns.
Supporters argue that the stock market offers higher returns than low-interest-bearing Treasury bonds. The idea is inspired by something private pension funds have done for years — using a market-based investment strategy.
However, the stock market is inherently volatile, and losses could jeopardize future benefits. Critics argue that Social Security shouldn’t be exposed to such risks.
This potential solution has been floated by a few different lawmakers in recent years, including Senator Bill Cassidy in 2023. But the idea has been met with skepticism. Many lawmakers are hesitant to expose Social Security to market fluctuations, and the current system is generally considered reliable albeit insufficient.
The last-minute solution: Using general revenue to fund Social Security
While Congress is unlikely to slash Social Security benefits entirely, their gridlock might force them into a drastic solution: A taxpayer-funded rescue.
Without significant compromise, Social Security might be forced to rely on a general revenue bailout. Adding general revenue would mean Social Security would, for the first time, contribute to the national debt, as the money would likely be borrowed. It could also place Social Security in a similar position to other programs dependent on annual congressional appropriations.
This hail-Mary approach wouldn’t be without cost, though – income taxes would likely need to increase to shoulder the burden. The high-stakes political drama of such a solution would likely only fuel existing concerns many Americans have about the stability of Social Security.
Still, raising income taxes to compensate for general revenue borrowing could create a more equitable way to ensure the program’s financial solvency.
How is Social Security funded?
Payroll taxes are the primary funding source for Social Security. These taxes are deducted directly from your paycheck before you receive it. This system is facilitated by the Federal Insurance Contributions Act (FICA), which requires contributions from both employees and employers.
By keeping this money in trust funds, the system aims to guarantee resources are available to pay current beneficiaries.
Aside from payroll taxes, Social Security is also funded by smaller amounts of revenue from interest earned on trust fund bonds and taxation of benefits.
Up until 2010, Social Security income from taxes kept pace with program costs. However, since then, expenses have been outgrowing income. Initially, the program relied on interest earned by the trust fund to cover the gap.
Unfortunately, in 2021, even that wasn’t enough. To meet benefit obligations, the government began directly dipping into the trust fund itself. These withdrawals will continue until the Old-Age and Survivors Insurance (OASI) Trust Fund — the pool of money used specifically to pay for Social Security retirement benefits — runs dry in 2035.
The main driver of this imbalance is the rising cost of the program. The U.S. population is aging, which is putting a bigger strain on the program. A growing number of retirees are now drawing Social Security benefits, and there’s a smaller working population to support them. This puts added pressure on the program’s finances.
Bottom line
Social Security faces a significant funding challenge due to a projected imbalance between future program costs and available income. Lawmakers have a little over a decade to solve this complex puzzle that’s perplexed policy makers for years. There are plenty of solutions on the table. But the longer the delay, the more costly a potential fix is going to be.
