4 minEconomy
Social Security Fix Would Raise Wage Ceiling, Tax Rate, and Retirement Age
A proposed three-part compromise would raise the taxable wage ceiling to $400,000, gradually increase the employee payroll tax rate to 7.2%, and move the full retirement age to 70 for younger workers.
Social Security's finances can be stabilized without cutting benefits for current retirees, but the fix would require higher taxes on top earners, a gradual payroll tax increase for all workers, and a later retirement age for younger Americans, according to a proposal that outlines three politically difficult changes.
The plan addresses a shortfall that is often described inaccurately. Social Security will not suddenly run out of money. Even if its trust fund reserves are depleted, payroll taxes will continue flowing in. The problem is that those taxes will eventually cover less than 100 percent of scheduled benefits, forcing automatic cuts if Congress does nothing.
The first proposal would raise the taxable wage ceiling from $184,500 to $400,000. Under current law, employees pay 6.2 percent and employers match that amount, but the tax stops once wages exceed the cap. A worker earning $100,000 pays Social Security tax on every dollar, while someone making $1 million does not. Raising the ceiling to $400,000 would expose an additional $215,500 of wages to the tax for a worker at that income level. At the combined 12.4 percent rate, that could generate roughly $26,722 more per year from that worker and employer combined. Depending on how Congress structures the change, it could produce well over $1 trillion in additional revenue over a decade.
The second change would raise the employee Social Security tax rate from 6.2 percent to 7.2 percent gradually over 10 years, with a corresponding increase for employers. That amounts to 0.1 percentage point each year. For someone earning $75,000, the first increase would cost about $75 for the year. After a decade, that worker would pay an additional $750 annually at today's income. The gradual approach is intended to give workers and businesses time to adjust rather than imposing a sudden payroll tax increase.
The third proposal targets the retirement age. The full retirement age is currently 67 for people born in 1960 or later. The plan would not change the deal for someone who is 62 and has planned around retiring at 67. Instead, it would draw a line for younger workers. For those born after 1990, the full retirement age would gradually move to 70. Someone born in 1991 turns 35 this year and would have decades to plan for the change. The adjustment reflects longer life expectancy, which has risen significantly since the program was created.
The political obstacles are substantial. Republicans generally oppose tax increases. Democrats generally oppose benefit reductions. Workers and employers do not want to pay more. High earners would face payroll taxes on more than $200,000 of additional wages. And few people want to hear that they may need to work until 70.
But the plan's supporters argue there are only three levers available to fix Social Security without means testing: tax more income, raise more revenue, or reduce future benefits. This proposal pulls all three. Higher earners pay Social Security tax on more wages. Workers and employers gradually contribute more. Younger Americans wait longer for full benefits. And the program does not run out of money, because payroll taxes continue coming in even if reserves are exhausted.
The alternative is that the longer Washington waits, the uglier the eventual solution becomes. Nobody gets everything they want under this plan, which is exactly why it might work.
