If you're someone who's worried that Social Security won't be around to pay you benefits during retirement, you're not alone. Many people fear that the program's financial woes will affect their future finances for the worse.
So let's start with the good news, which is that Social Security is not in danger of going away completely. The program gets the bulk of its funding from payroll tax revenue. So as long as there's an active labor force, Social Security can continue to pay benefits to some degree.
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But in the coming years, Social Security is expected to collect less payroll tax revenue as baby boomers exit the workforce in droves. And while the program does have cash reserves in the form of trust funds, those are expected to run dry in about a decade's time. From there, benefit cuts could be on the table.
However, lawmakers may be able to step in and prevent those benefit cuts. Here's what that might look like.
Options for preventing Social Security cuts
Social Security cuts have the potential to affect current and future retirees. And lawmakers are well aware that many seniors are heavily reliant on those benefits to cover their basic expenses. Preventing Social Security cuts could therefore be akin to preventing a massive retiree poverty crisis.
One option lawmakers are considering to avoid cuts to Social Security is pushing back full retirement age (FRA), which is the age at which recipients are entitled to their complete monthly Social Security benefit based on lifetime earnings. Currently, FRA sits at 67 for anyone born in 1960 or later. Pushing that age back to 68 or 69 could help the program from a solvency standpoint.
Another thing lawmakers can do is make changes to the way wages are taxed for Social Security purposes. Currently, there's a cap in place, and earnings above $168,600 are not taxed to fund Social Security. If lawmakers were to raise or eliminate that cap, the program could enjoy a serious cash infusion. That said, lawmakers would also have to balance an absent or lifted wage cap with the fact that Social Security, in its current form, has a maximum monthly benefit it's willing to pay.
Finally, rather than make changes to the wage cap, lawmakers might instead change the rate of tax that's applied to wages to fund Social Security. Right now, salaried workers pay 6.2% of their wages into Social Security, while their employers match that same amount. Self-employed individuals pay 12.4% into the program. Raising that total to, say 16.4% could do the program a lot of good -- though it might make workers less happy in the near term.
Lawmakers may have to move quickly
Clearly, there are some options on the table for preventing Social Security cuts. But lawmakers may need to act quickly to implement any of the solutions above.
This especially holds true with regard to the first solution presented -- pushing back FRA. Workers who were born in 1960 are 64 or turning 64 this year, so they're right on the cusp of FRA and have no doubt planned their retirements around it. It would be unfair to impose such a big change on older workers without a heads-up of sorts.
Of course, the most likely scenario here is that lawmakers would gradually raise FRA, and not necessarily for workers who are already in their 60s. But either way, Social Security's trust funds only have so much staying power. If lawmakers want to make sure benefit cuts don't happen, they really can't afford to sit on a decision for much longer.
