Social Security shortfall: Higher taxes, reduced benefits to come?

Steps to fixing Social Security

Committee for a Responsible Federal Budget Senior Vice President Marc Goldwein on what is needed to save Social Security.

Social Security recipients will have their benefits cut after 2034 unless Congress takes action to make changes to the system.

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The total costs of Social Security will exceed total income this year for the first time since 1982, according to the annual Social Security and Medicare trustees report released earlier this month.

The trustees forecast that 100% of benefits will be covered through 2034, after which the trust funds for Social Security, which also cover old age and disability insurance programs, will only be able to cover about 79% of benefits.

“Everybody knows something is going to have to change or, as of 2034, there will be a large percent cut [from benefits],” Bob Spence, a financial planning consultant at Raymond James, told FOX Business.

While adjusting the terms of the program may be an unpopular task, waiting longer to address the system’s shortcomings could have larger repercussions for working Americans.

Here are some ways recipients might expect the system to change throughout the coming years.

Raise taxes

The most likely adjustment that will be made to Social Security is raising the payroll tax, Spence said.

The trustees predict that if they raise the payroll tax immediately by 2.78%, they can fully fund the system for another 75 years.

However, the longer lawmakers wait to make that move – if they choose to do so — the more they will have to hike the tax, Spence noted.

Employers and employees split the payroll tax down the middle, so with the current rate of 12.4%, each side pays 6.2%.

If the tax was raised now, by the suggested 2.78%, each party would be contributing an extra 1.4%. For a worker making $50,000, that’s $695 more each year, while for someone making $100,000, it would amount to an extra $1,400.

Spence said if lawmakers wait until the 2034 to take action, they will have to raise the tax to nearly 16.2%, which means a worker with a salary of $50,000 would be on the hook for an additional $1,900 per year.

The program has also been slowly increasing the amount of workers’ salaries that are subject to the payroll tax by raising the cap on what is taxable, which is something Spence expects will continue to happen. The cap may also be eliminated altogether.

Adjust benefits

Raising the retirement age is another potential method to address Social Security’s shortfall.

While the retirement age for those born after 1960 is 67, Spence said that could be increased even higher. The rate at which an individual can first receive benefits could also be increased by a couple of years.

Another strategy would be to lower the cost-of-living adjustment, also known as COLA, which is used to offset the impact of inflation on benefits.

Lastly, potentially the least popular option would be to reduce benefits for recipients. Spence noted this is an unlikely outcome.

Any changes implemented would not have a significant impact on current retirees, but younger working Americans would be affected, Spence noted.