Saving Social Security Might Involve Raising Taxes. Here's Why It May Not Be as Bad as You Think
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You pay 6.2% of the first $176,100 you earn in Social Security payroll taxes in 2025. Self-employed workers pay even more. That's already a pretty substantial bite out of your annual income, so it makes sense if you're not a fan of raising payroll taxes as a way to keep Social Security solvent.
But the fact remains that the program is now less than a decade away from being unable to pay out all scheduled benefits. If we don't want smaller checks in retirement, Congress has to find a way to increase Social Security's income. Higher payroll taxes are likely going to be a part of whatever fix it comes up with, but it might not be as painful as you'd imagine for the following reasons.
Right now, high earners don't pay any Social Security payroll taxes on income over $176,100. However, many feel this is unfair. Some have proposed raising or even eliminating this ceiling so the wealthy would pay more into the program.
The exact effects depend on which version of this plan you're looking at. If Congress were to make all earnings subject to the current Social Security payroll tax, you could eliminate roughly 53% of Social Security's estimated funding shortfall. Under the current Social Security benefit formula, the more you pay into the program, the more you're entitled to get out of it. But if you required the wealthy to pay Social Security taxes on all their income without a corresponding benefit increase, you could wipe out 73% of the estimated shortfall.
Neither scenario would be enough to completely eliminate Social Security's projected deficit, but it would go a long way. If the government enacted one of these proposals, it would significantly reduce the payroll tax increase necessary to keep the program solvent.
The current Social Security payroll tax is actually 12.4%, but it's split equally between employee and employer for traditionally employed workers. Self-employed individuals must pay the full 12.4%, but they get a deduction for half the self-employment taxes they pay.
Since most workers don't pay the full Social Security tax themselves, they wouldn't have to bear the full brunt of any future tax increases themselves, either. If the government decided to increase the Social Security tax rate by one percentage point, for example, most workers would only pay half of that increase.
Increasing Social Security payroll taxes is just one of many potential strategies people have suggested as a way to fix the program's funding crisis. Other possible reforms include:
Raising the program's full retirement age (FRA), currently 67 for most workers today
Reducing benefits for some or all seniors
If the government enacts one or more of these other strategies, that would also reduce the tax increase required to keep Social Security solvent.
It's too soon to tell what Congress will decide, but there doesn't seem to be a reason to worry about significant tax increases right now. Once Washington appears close to passing a bill reforming Social Security, then it'll be time to take a closer look at how its changes could affect your budget going forward.
View the "Social Security secrets" »
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Saving Social Security Might Involve Raising Taxes. Here's Why It May Not Be as Bad as You Think was originally published by The Motley Fool
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