If nothing is done to change course, Americans on Social Security may see their monthly benefits drop by 25% in the years ahead. That’s because the Social Security trust fund reserves could become insolvent within the next decade. Some experts say raising the Social Security payroll tax cap could help solve the problem.
Currently, workers pay 6.2% of their wages, and their employers match that contribution. However, any earnings over the income cap of $160,200 are exempt from the tax (a limit that roughly 6% of wage earners hit).
Raising the Cap
Raising the income cap to $250,000 (or more) or eliminating it altogether could replenish the trust fund reserves and keep the program running at full capacity beyond the next decade. Doing so would also shift some of the burden of funding Social Security from the middle class to wealthy, high-wage earners.
Currently, those earning over the cap pay an effective Social Security payroll tax rate of 1% or less. However, those earning under the cap get stuck footing a bill that’s six times higher.
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Other Potential Solutions
Not all experts and lawmakers agree that increasing the Social Security payroll tax cap is the best way to solve the problem. Other proposed solutions include:
- Raising the full retirement age to 70 (now 66 to 67).
- Increasing the payroll tax rate to 15.6% (from 12.4%).
- Privatizing Social Security.
- Imposing a Social Security tax on business and investment income (currently exempt).
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