How to Save Social Security: Key Policy Proposals

Social Security holds a foundational role in American society, providing a safety net for millions of retirees, individuals with disabilities, and survivors. This program operates on a pay-as-you-go system, where current workers’ contributions fund the benefits of today’s recipients. The system functions through dedicated payroll taxes, linking current workers’ contributions to today’s recipients. Over time, shifts in demographics, including increased life expectancy and lower birth rates, have created long-term financial challenges for Social Security. These demographic trends necessitate a discussion about potential adjustments to the system to ensure its future stability.

Proposals to Increase Social Security Revenue

Social Security’s primary funding mechanism relies on dedicated payroll taxes, known as Federal Insurance Contributions Act (FICA) taxes. Employees and employers each contribute 6.2% of an employee’s earnings, totaling 12.4%, to the Old-Age, Survivors, and Disability Insurance (OASDI) program. Self-employed individuals pay the full 12.4% rate. However, these taxes only apply up to a specific annual earnings limit, which for 2025 is set at $176,100.

One approach to increase the system’s financial resources involves adjusting the payroll tax rate. A proposal could involve a modest increase in this rate, for example, raising it from 6.2% to 7.2% for both employees and employers. Such an adjustment would immediately generate additional revenue for the Social Security trust funds. This increased percentage would apply to all taxable earnings, broadening the income base.

Another significant proposal focuses on the Social Security taxable earnings cap. Currently, earnings above this annual limit are not subject to the 6.2% Social Security tax. For instance, an individual earning $200,000 in 2025 pays Social Security taxes only on the first $176,100 of their income. One modification involves raising this cap significantly, perhaps to cover 90% of all earnings in the economy. Alternatively, eliminating the cap entirely would subject all earned income to the Social Security payroll tax. This change would substantially increase the total amount of taxable wages flowing into the system.

Proposals to Adjust Social Security Benefits

Modifying the outflow of funds from the Social Security system involves adjustments to benefit payments. The existing benefit structure incorporates the Full Retirement Age (FRA), which is the age at which individuals are eligible to receive 100% of their earned Social Security benefits. For individuals born in 1960 or later, the FRA is 67, while for those born in 1959, it is 66 years and 10 months.

One proposed adjustment involves gradually increasing the Full Retirement Age beyond 67. For example, the FRA could be incrementally raised to 68 or 69 over several years. This change would reduce the total duration over which individuals receive benefits, as they would either claim benefits later or accept a permanently reduced benefit if they choose to claim early. Such a measure would decrease the overall expenditures from the Social Security trust funds.

Another area for adjustment concerns the Cost-of-Living Adjustment (COLA), which provides annual increases to Social Security benefits to help maintain their purchasing power against inflation. The current COLA calculation is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

A proposal to modify the COLA formula suggests using a different inflation measure, such as the Chained CPI. The Chained CPI generally reflects a lower rate of inflation because it accounts for consumers changing their purchasing habits when prices for certain goods and services rise. Implementing the Chained CPI would result in smaller annual benefit increases over time, thereby reducing the rate at which Social Security outlays grow. For instance, the 2025 COLA was 2.5%, and a different index could lead to a lower adjustment.

Furthermore, adjustments could be made to the initial benefit calculation formulas. Social Security benefits are calculated based on a worker’s average indexed monthly earnings (AIME) over their 35 highest-earning years. Proposals sometimes suggest altering the “bend points” within this formula, which determine the percentage of AIME that translates into benefits. Reducing these percentages, particularly for higher earners, would result in lower initial benefit payments for future retirees, thereby moderating the system’s long-term financial obligations.

Other Policy Approaches for Social Security Solvency

Beyond adjustments to revenue and benefits, other policy approaches contribute to Social Security’s long-term financial stability. One distinct approach involves the implementation of means-testing for Social Security benefits.

Means-testing entails reducing or potentially eliminating Social Security benefits for beneficiaries who have incomes above certain thresholds. This approach aims to direct resources more efficiently by prioritizing support for those with greater financial need. For example, benefits could be gradually phased out for individuals or couples whose Adjusted Gross Income (AGI) exceeds predetermined limits. The mechanism for means-testing could involve a graduated reduction, where benefits decrease by a certain percentage for every dollar earned above a specified income level. This reduction would directly lower the total amount of benefits paid out by the system. By focusing benefit payments on those who rely on Social Security more heavily, means-testing seeks to reduce overall outlays without broadly impacting all beneficiaries.