With Social Security just a few years away from bankruptcy, it’s more important than ever to build up your retirement savings so you’re prepared to cover what your benefits don’t cover. Every dollar you set aside now can grow into tens or hundreds of dollars when you’re ready to leave the workforce.
If that’s not enough incentive to save for retirement, then a possible change to Social Security may be on the horizon. While this can help the program avoid a reduction in benefits, it may be more challenging for retirees than it is today.
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Social Security’s trust funds are expected to run out of money around 2032, according to a recent Congressional Budget Office report. This could reduce benefits by nearly 20% if the government does not step up and change the program to make it sustainable for future generations.
The problem is that the only way to avoid reducing benefits is to increase program revenue, and that comes from taxes. Most of Social Security’s funding comes from payroll taxes that all workers pay on their first $184,500 of earnings in 2026. Currently, the tax is 12.40%, split equally between employees and employers.
The government can raise this tax to generate more revenue for the program, thereby reducing workers’ after-tax income. This will leave them with less money to spend on living expenses or to save for long-term goals, such as retirement.
The Trustees’ latest report shows that to fully address the funding shortfall, the payroll tax rate would increase by 4.27 percentage points to 16.67%. Remember, regardless of whether you’re at work, you’ll only get half as much, or about 2.14 percentage points. But it’s still a significant change.
Those making $60,000 a year would lose 8.34% of their income to those taxes — about $5,000 — compared to the 6.20% or $3,720 they pay now. That’s an annual loss of more than $1,280.
The good news is that this is not guaranteed to happen. Raising payroll taxes is one of many strategies the government can use to address Social Security funding issues. Other proposals, such as raising the profit tax rate, would affect seniors rather than workers.
