INVEST IN JOY
Cygan: Here are two fixes to save Social Security by 2032
In early August, I wrote an article about the 22% Social Security shortfall that is predicted to occur in late 2032, along with eight potential solutions.
As I detailed in my first column, a combination of strategies will be needed because of the numerous factors negatively impacting the future of Social Security. The factors include a declining birth rate in the U.S., Americans living longer, President Donald Trump鈥檚 2017 Tax Cuts and Jobs Act and his 2025 One Big Beautiful Bill Act, and immigration policies that reduce payroll taxes.
I asked readers to respond with their recommendations. The responses were thoughtful and detailed, conveying a clear understanding of the shortfall and potential solutions.
Everyone who responded agreed that the salary cap should be lifted. Social Security payroll taxes currently only apply to $184,500 (per wage earner). Eliminating the salary cap so Social Security (and disability) payroll taxes apply to all earned income has been proposed for many years.
My first article noted that only 6% of workers earn over $184,500, implying that eliminating the salary cap may not have a major impact in solving the 22% shortfall. One responder questioned what the impact would actually be. With further research, I found that the Social Security Administration estimated eliminating the salary cap would satisfy 67% of the long-term shortfall. Clearly, this change alone would have a major impact.
The other point all respondents agreed on is that Social Security should not be privatized, and individuals should not be expected to invest their future Social Security benefits.
Several other readers鈥� comments were noteworthy, although there was not a consensus on these topics:
Raise the early retirement age and the full retirement age. Currently, Social Security benefits can be claimed as early as age 62, and the full retirement age (for persons born in 1960 or later) is 67. If someone claims their benefit at age 62, it is reduced by roughly 30% (as compared to the amount that would be received at age 67). Delaying the receipt of benefits until age 70 provides a roughly 24% higher amount (compared to age 67). A potential change would be to raise the early retirement age and full retirement age by one year. However, some have proposed raising the full retirement age from 67 to 70. Increasing the penalty for claiming early, or decreasing the added benefit for waiting until age 70, could also be changed.
Tax high-net-worth people more, and lower Social Security benefits for the very wealthy. The idea that wealthy people should pay higher taxes has broad support among voters, and many strategies have been proposed. However, in today鈥檚 political climate, very high-net-worth people have tremendous power due to the dollars they contribute to influence policy and keep their taxes low.
Increase the payroll tax rate, which is currently 6.2% from the employee for Social Security and Disability, and another 6.2% from the employer. The Social Security Board of Trustees recommended raising the employee and employer tax by 4.25%, to 10.45%.
Some possible solutions
Taking into account the feedback from readers and recognizing that we need Congress to act quickly to repair the Social Security system before the shortfall in 2032, I propose two solutions.
Eliminate the salary cap so persons with earned income over $184,500 pay Social Security and Disability payroll taxes on their full income. This change will only impact very high earners, and they can afford to pay higher payroll taxes.
Increase the payroll tax rate from 6.2% for employees and 6.2% for employers to 8.2% for employees and employers. I realize this is a tax increase, and it will impact workers and employers financially. However, the situation with the future of Social Security is dire, and drastic steps are needed.
The above two strategies could be enacted by Congress to be effective as early as Jan. 1, 2027.
Other solutions 鈥� such as means testing that would reduce Social Security benefits for the very wealthy and raising the early retirement age and full retirement age 鈥� should be considered in a few years if the solutions above do not fix the Social Security shortfall.
Interestingly, none of the readers who provided feedback made overtly political statements. However, one reader stated that he is very concerned for his children and grandchildren, noting they may be forced to pay much higher taxes in the future.
He added, 鈥淚 don鈥檛 believe that the federal government has been a good steward of our tax dollars.鈥�
Many people would agree with that statement.
Donna Skeels Cygan, CFP庐, MBA, is the author of 鈥淭he Joy of Financial Security.鈥� She owned a fee-only financial planning firm in Albuquerque for over 20 years before recently retiring. She welcomes emails from readers at donna@donnaskeelscygan.com.
