With Social Security facing an insolvency crisis in the coming decade, discussions about reforming the program are heating up. A recent survey has shown that most Americans are open to one specific reform: lowering benefits for the top 40% of earners. This proposal could reduce Social Security’s projected shortfall by 23%.
The Social Security Administration (SSA) is forecasted to face a funding deficit as early as the mid-2030s, largely due to demographic shifts. With Baby Boomers retiring in large numbers and fewer younger workers entering the labor force to pay into the system, the SSA may struggle to provide full benefits unless substantial changes are made. Without reforms, the Social Security Trust Fund is expected to be depleted by 2033, which could result in a reduction of up to 23% in benefits if no measures are implemented.
The financial strain is exacerbated by the fact that Social Security is funded primarily through payroll taxes. Currently, wages subject to Social Security taxes are capped at $160,200, and any wages earned beyond this are exempt from additional payroll taxes. This cap means high earners contribute a smaller proportion of their income to Social Security compared to middle- and low-income workers. Reforms targeting this discrepancy could help bridge the funding gap.
The majority supports cutting benefits for high-earners
According to a survey by the Program for Public Consultation at the University of Maryland, roughly 4,600 adults, 53% of Americans, would support reducing Social Security payments for the top 40% of earners as a way to help resolve the program’s financial challenges. This proposal is seen as a more palatable solution than across-the-board benefit cuts or tax increases. Under this plan, high-income retirees, who are less dependent on Social Security for their retirement income, would see a reduction in their monthly payments. This adjustment would reduce the program’s shortfall by nearly a quarter, making a significant impact on its financial outlook.
However, this proposal is not without its critics. Alex Beene, a financial literacy instructor, noted that such a move could set a dangerous precedent, leading to further cuts down the line that might affect all retirees.
“While it’s always tempting to solve financial problems with a program by cutting costs, lowering benefits for any Social Security recipients, even higher-income ones, is a bad decision,” said Beene. “Not only is it unfair to those recipients who also paid in, but it does distrust among those unaffected that eventually their benefits will be slashed as well.”
He added, “To be fair, that’s always a possibility. When cuts can come to one sub-group in a larger group, it unfortunately sends the message to some legislators they can do the same to an ever-expanding pool of recipients.”
Tax reform as an alternative solution
One popular option is increasing the payroll tax cap, which would require high earners to contribute more of their income to the system. Currently, the payroll tax only applies to earnings up to $160,200, meaning that wages beyond this threshold are not taxed for Social Security purposes. Many respondents, both Republicans and Democrats, agreed that this cap should be raised or eliminated. Raising the payroll tax cap could inject much-needed revenue into the program without reducing benefits for retirees.
Another proposal with support, is gradually increasing the retirement age. This approach would acknowledge the reality that people are living longer and can work later in life. Nearly 90% of respondents in swing states favored raising the retirement age, which could close 15% of the funding gap. While this would mean future retirees might have to wait longer to start receiving benefits, it could be a less painful way to extend the solvency of Social Security without major benefit reductions.
The complexity of means testing
A key issue in the debate over cutting benefits for high earners is the concept of means testing, adjusting benefits based on a retiree’s income or assets. While many Americans are open to the idea of reducing benefits for the wealthiest retirees, the specifics of how this would be implemented are more contentious. Drew Powers, founder of Powers Financial Group, pointed out that Americans’ opinions shift depending on the language used to describe the proposal.
“Once clarifying language was added, such as ‘middle class in high cost of living areas’ or ‘paying into Social Security on the promise of benefits’, the answers were very much against reducing benefits for higher-income retirees,” said Powers.
“I think this shows the willingness of Americans to debate and adopt a more complex system of means testing for Social Security. For top earners, Social Security benefits end up being such a small piece of the retirement pie that most would not truly miss the income it provides.”
While most high-income earners do not significantly rely on their Social Security benefits, lowering their benefits outright would still likely stir great opposition in America, said Kevin Thompson, a finance expert and the founder and CEO of 9i Capital Group.
“A means test may be necessary to keep Social Security sustainable, but I don’t believe reducing benefits for high-income earners, based on their income percentage, is the right approach,” Thompson said. “Many individuals, along with their representatives, would likely oppose such a measure.”
