As they enter retirement, these concerns seem more palpable than ever.
Understanding the Concern
At its core, Social Security relies heavily on current workers’ payroll taxes to fund its benefits. The simple premise: today’s workers fund today’s retirees, expecting future generations to do the same for them when it’s their turn. However, as the substantial baby boomer generation exits the workforce, there aren’t enough incoming workers to sustain the same level of contribution. This imbalance threatens the primary revenue stream of the program.
While Social Security does have trust funds to draw upon, they are finite. Current projections expect these funds to be exhausted by 2034. Although this timeline might shift based on various factors, it’s clear that some form of intervention is needed to keep the program solvent.
One of the prominent solutions being discussed among lawmakers is the possibility of raising Social Security taxes. Presently, workers pay a 12.4% tax on their wages up to a yearly-adjusted cap, which for this year stands at $160,200. For most employees, this tax is divided evenly between them and their employers. However, the self-employed bear the full weight of this 12.4%.
To address the impending shortfall, two main proposals are on the table:
- Raising the wage cap: By increasing the income cap subjected to Social Security tax, a larger portion of high earners’ incomes would contribute to the program. However, it’s essential to note that this would only affect a minority who earn above the current cap.
- Increasing the tax rate: A more comprehensive approach is to raise the 12.4% rate for all workers. This method would affect everyone, not just those with higher incomes. Though more widespread, such a move could be met with significant resistance, given its impact on workers across income brackets.
Preparation is Key
While neither solution seems particularly palatable, taking no action may result in even more challenging consequences. To mitigate potential increased tax burdens, individuals can consider strategies like investing more in retirement accounts, such as IRAs and 401(k) plans, or capitalizing on available tax deductions related to homeownership or entrepreneurial ventures.
It’s undeniable that reforms are needed to ensure Social Security‘s longevity. As we approach this crossroads, proactive planning and informed decision-making are critical for both current workers and those soon to retire.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
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