Social Security Solvency Options

Various proposals would help close the trust fund shortfall by either removing this cap altogether or setting it higher to capture a larger share of wage growth above the cap. Most of these proposals would increase benefits to reflect higher earners’ increased contributions but at a lower rate of return.

Increase the payroll tax rate

Employees and employers each pay a 6.2 percent payroll tax on the first $176,100 of annual wages. This is part of the FICA tax on your paycheck. (Self-employed people pay both shares, adding up to 12.4 percent of their net income.)

One way to help close the Social Security funding gap would be to increase the payroll tax rate. Various proposals would phase in this increase over time, raising both the employer and employee share of the payroll tax.

Use other funding

By law, Social Security is a self-financed program paid for by a 6.2 percent payroll tax on both employees and employers (12.4 percent for the self-employed). Congress does not appropriate funds annually to pay benefits, and the general U.S. revenues are not used.

Congress could change that to reduce or eliminate the Social Security shortfall. For example:

• Congress could use money from the U.S. general fund to help pay benefits.
• Congress could tax other forms of income, such as investment income, to supplement the payroll tax base.
• Congress could create a new fund to invest in the private market and use the returns to help pay benefits over time. Lawmakers could borrow initial deposits, which could be paid back at a later date.

Raise the full retirement age

Many Americans are living and working longer. One option would be to raise the full retirement age — which is 67 for people born in 1960 and thereafter — to 68, 69 or 70.

Most proposals would phase in this change over time to protect those currently at or near retirement from any increase. The minimum claiming age of 62 would be preserved, which is important for those who do arduous work or have health or caregiving challenges. 

However, every one-year increase in the full retirement age reduces benefits for those claiming at 62 by roughly 6 percent. Additionally, because of the long phase-in time, the program would likely not see savings for several decades.

Reduce benefits for people with higher incomes

The way Social Security is set up, people who had lower wages throughout their working lives receive lower benefits, but those benefits replace a larger share of their work income than for higher earners. Some proposals would change the benefit formula to return even less money, proportionally, to those who earned more during their lifetimes.

Another approach would be some form of means testing — reducing benefits for people who have greater income or assets in retirement and, in theory, need Social Security less.