A potential Social Security tax rate hike could cost the average American up to $3,000 a year. But the alternative could be running out of this crucial safety net. This is what you need to know about the growing Social Security crisis, including possible solutions to fund the rapidly depleting safety net.

Details of Proposal to Raise Social Security Taxes

It is no secret that the nation's Social Security fund is running out of money. Some lawmakers and economists have proposed raising taxes in an effort to prevent cuts to the benefit in the next few years. A new calculator shows that these tax hikes would cost the average American up to $3,000 annually.

The latest Board of Trustees report noted that the trust fund used to supplement the payroll taxes earmarked for Social Security benefits is expected to run out of money at the end of 2032. This depletion would trigger an immediate cut of 22% to the monthly benefits check.

Some experts are now proposing to raise taxes in order to fill this projected funding gap. The proposed tax hike would be split in half between employers and their workers earning up to $184,500 in 2026.

To put this into context, the median full-time American worker earning $61,583 would be subject to $2,617 - $3,024 in additional taxes each year. These estimations are from the libertarian think tank the Cato Institute. Romina Boccia, Cato's director of budget and entitlements, said that "These (tax) increases amount to roughly two months of the median rent countrywide."

The current Social Security payroll tax rate is 12.4%. Earlier this year, Social Security trustees estimated that a payroll tax rate of 16.65% would suffice in closing the funding gap. This compares to an estimate from the Congressional Budget Office (CBO) last year that detailed that a rate of 17.31% is necessary to close this delta.

While the increased taxes would not all come directly out of employees' take-home pay since the tax is split between the employer and the worker, self-employed Americans would bear the brunt of the entire hike.

Economists are also warning that workers may pay the price in more ways than just take-home pay. Alex Durante, senior economist at the nonprofit, nonpartisan Tax Foundation, noted that the general idea is that  "employees pay the employer-side of the payroll tax through lower wages." In other words, a company is more likely to reduce wages to make up for the difference that they have to contribute to Social Security.

This opinion lines up with a CBO analysis that demonstrated that workers bore 58% of the federal payroll tax rate hike of 1 percentage point in the short term; however, employees would end up taking on more than the entire economic impact. The CBO predicted that workers would eventually be responsible for 152% of the burden if additional revenue was used for purposes such as funding Social Security.

Other Ideas to Beef Up the Social Security Trust Fund

Many politicians, especially those on the left, are against raising taxes across the board to fund the shrinking Social Security trust fund. A joint partisan effort between Democratic Sen. Elizabeth Warren and GOP Sen. Bernie Moreno is urging Congress to lift the current Social Security payroll tax cap of $184,500. This cap currently mandates that workers making over this threshold stop paying into Social Security once that income level is reached each year. Should this cap be removed, America's wealthiest Americans would continue to pay into Social Security even after this threshold is crossed.

Critics of this idea say that the numbers do not add up. For instance, the Social Security Administration (SSA) said that the plan to lift the cap would only keep the benefit fund out of a deficit for just four years.

Other economists suggest gradually increasing the full retirement age (FRA) of 67 years by three months each year. This means that Americans would need to work longer before they could tap into their benefits. Another idea is to cap the dollar amount of the annual cost-of-living adjustment (COLA) that Social Security benefits see each January. Both of these proposals fall under the category of benefits cuts, making them difficult to enforce.  

A 2024 analysis by the Center for American Progress (CAP) found that a FRA of 69 would reduce benefits for the recently retired by as much as 14.3% overall. These losses are amplified after years of receiving Social Security. For instance, CAP reported that the median-wage retiree would lose between $46,104 and $99,252 after a decade of receiving the benefits.

The takeaway is that there are no easy answers when confronting the Social Security funding crisis.

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