The trust funds for Social Security are anticipated to deplete by the year 2034. If the government fails to identify a way to enhance the funding for the program, this could result in significant reductions in benefits. An increase in Social Security payroll taxes is commonly proposed, yet it tends to be unpopular since it would decrease the amount of money available for workers to spend.
Nevertheless, one proposed tax reform aimed at increasing revenue has received considerable backing from Americans across various political affiliations. At present, the majority of employees contribute Social Security payroll taxes on their full income, with high earners being an exception. As of 2024, only the initial $168,600 of a taxpayer’s income is taxable under these provisions.
Earnings exceeding this threshold are not subject to Social Security taxes and do not contribute toward enhancing an individual’s retirement benefits. A significant number of people argue that higher-income individuals should contribute more toward Social Security taxes in order to help maintain the program’s viability. One suggested reform involves abolishing the income ceiling for Social Security payroll taxes, requiring everyone to pay the 12.4% tax—divided equally between employee and employer—on their total wages.
Another suggested reform is the “donut hole” concept. This system would eliminate Social Security payroll taxes for earnings exceeding the $168,600 cap (which would be adjusted each year) and reintroduce them for those with annual incomes surpassing $400,000. For instance, an individual earning $200,000 each year would only be taxed on the first $168,600 of their income.
Donut hole receives bipartisan support
Conversely, if a person made $450,000, they would incur Social Security payroll taxes on their initial $168,600, as well as on the $50,000 that exceeds the $400,000 threshold. A recent survey by the University of Maryland examined the opinions of adults in six pivotal swing states ahead of the 2024 elections.
The findings revealed that a significant majority was in favor of the “donut hole” strategy, with 87% supporting it, reflecting similar support levels among Republicans, Democrats, and Independents. However, despite its appeal, this reform by itself wouldn’t guarantee the future solvency of Social Security.
The study from the University of Maryland found that this approach could reduce the funding deficit by approximately 60%. As a result, additional measures would need to be enacted by the government to ensure Social Security remains viable for coming generations. These may include increasing the program’s funding and reassessing the benefits provided to retirees, disabled individuals, surviving spouses, and their families.
The “donut hole” strategy is attractive as it alleviates the financial pressure on everyday workers, in contrast to other proposals such as boosting the payroll tax rate or elevating the full retirement age, both of which would directly affect workers by lowering disposable income or heightening penalties for early claims. Achieving a comprehensive solution is intricate and necessitates a balance of different interests. Decisions made by the government will be critical in tackling the funding challenges facing Social Security in the near future.
In the meantime, the most effective way for workers to prepare for potential adjustments is to save independently, thereby minimizing reliance on Social Security benefits.
