Social Security is in trouble.
To be clear, the program is not in danger of going away. But benefit cuts are a big possibility.
How did we get here?
In a nutshell, Social Security’s resources are being drained due to a mass exodus of baby boomers from the labor force. The program’s primary revenue source is the income it collects via payroll taxes — the ones workers pay on the money they earn. But as baby boomers exit the workforce and not enough workers come in to replace them, that revenue source is likely to continue to shrink.
Now Social Security has trust funds it can fall back on to keep up with scheduled benefits — that is, until those trust funds run dry. The program’s Trustees expect that to happen in 2034, though that timeline could change for better or worse in the coming years.
The good news is that lawmakers have floated several proposals designed to pump more revenue into Social Security and prevent benefit cuts. The bad news is that one of their most feasible ideas could leave you paying into the program even more.
Are Social Security taxes going to increase?
Social Security taxes amount to 12.4% of wages up to a certain point that changes every year. This year, workers pay Social Security tax on up to $160,200 of income. Those who have employers split that 12.4% tax evenly with the companies they work for, while people who are self-employed have to fork over that entire 12.4% themselves.
Raising the wage cap for Social Security tax purposes could do the job of shoring up the program’s finances and avoiding benefit cuts. But going this route may not be as effective as some might think, since it’s a relatively small portion of the population that earns more than $160,200.
A more far-reaching solution could be to raise the amount of Social Security tax all workers pay from 12.4% to a higher percentage. That change would impact not just higher earners, but workers across the board. And as such, it’s the solution lawmakers may be most inclined to move forward with.
Of course, increasing Social Security taxes would no doubt put a burden on workers across a range of income levels. And it’s a solution many people might end up sorely unhappy with.
But it’s a solution that might be the best one nonetheless. And so it’s a good idea to gear up for the fact that Social Security taxes could grow even more burdensome in the coming years as lawmakers attempt to prevent benefit cuts.
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Clearly, that’s not ideal. But you can help soften the blow by seeking out other ways to lower your tax burden as a whole. That could mean pumping more money into an IRA or 401(k) plan, or even being more savvy with tax deductions that relate to things like homeownership and self-employment.
It’s clear that something needs to be done to address Social Security’s impending financial shortfall. Universally raising taxes could end up being the best thing lawmakers are able to come up with, and that’s a reality everyone needs to face.
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