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Social Security Solutions: Part 2

“Social Security Solutions” is a series that explores the pros and cons of several current proposals to try and save Social Security. All statistics listed here are from the Heritage Foundation, the National Academy of Social Insurance, and the AARP.

Eliminate the payroll tax cap

Currently, the first $110,100 of annual earnings are all that is subjected to payroll taxes for Social Security in a person’s income. However, there are proposals to eliminate the cap entirely, which would expose all earning to the Social Security payroll tax. Of all of the proposals, this would do the most to fill the funding gap, while most Americans would see no change in taxes, only those with incomes above $110,100, about 6% of the population. Those same individuals would also see a rise in benefits. Opponents, however, say that this idea would give too many rich individuals high benefits, which wasn’t what the system was intended for. This measure could fill the funding gap by 86%.

Reduce benefits for higher earners

Social Security benefits during retirement are based on previous earnings. Higher income workers receive higher payments, because they paid more into the system. However, they do receive a smaller percentage of previous earnings. There is currently a proposal to reduce the benefits of higher earners, making Social Security more of a need-basis. However, opponents say these wide reaching cuts (some with as much as the top 50% of earners) would affect middle class workers only making $35,000 per year. Also, these people already paid into the system, why should they suffer? Reducing benefits for 25% of the top earners by 15% would fill 7% of the gap, while reducing benefits of the top 50% by 28% could fill 31% of the funding gap.

Increase the payroll tax rate

Employees and employers each pay 6.2% of income on payroll taxes. This is what funds Social Security. There is a proposal to increase this tax to 7.2% from both employees and employers over the next 20 years. This would be a gradual increase, and not all at once. This, along with eliminating the earnings cap, would fill the funding gap completely, as well as help build a new nest egg. Opponents, however, don’t want any tax raises. This proposal could fill 64% of the funding gap.

Tax all salary reduction plans

Employees pay payroll taxes on contributions to their 401k, currently. However, other types of benefit plans don’t have payroll taxes applied to them. There is a proposal to tax these different plans, which proponents say would create consistency in the tax rate. Opponents worry that it might mean that employers are less likely to offer these types of benefits, however. This measure could fill 10% of the funding gap.