Social Security Has a Revenue Problem. The Solutions to Fix It Aren't Great.

If you've been hearing rumors that Social Security on the verge of going bankrupt, you should know that the program is not about to run out of money. Social Security can't run out of money because it gets most of its funding from payroll taxes.

But that doesn't mean things are looking rosy for Social Security. Quite the contrary -- in the coming years, the program is facing a critical revenue shortfall that could result in sweeping benefit cuts.

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If you're wondering "Why don't lawmakers do something about this?" the answer is that solving the problem isn't that simple. And while it's an issue that no doubt needs to be addressed, whatever solution is ultimately found could have unwanted consequences.

Why Social Security is on shaky financial ground

Social Security relies heavily on payroll taxes to stay afloat. It has other revenue sources, but that's the primary one.

In the coming years, though, baby boomers are expected to retire in droves and start claiming Social Security. And while younger workers will enter the workforce as that happens, the rate of replacement labor will leave Social Security with a payroll tax revenue shortfall.

Social Security can tap its trust funds to keep up with scheduled benefits in the absence of lawmaker changes. But once those trust funds run out of money, benefit cuts will be a real possibility if nothing else changes.

The solutions aren't pretty

Lawmakers are aware that ignoring Social Security's revenue shortfall won't do the public much good. Millions of seniors rely on those monthly benefits as their primary source of income. And many workers who are nearing retirement haven't saved nearly enough to get by without a substantial monthly Social Security check.

The problem, though, is that each potential solution for pumping critical revenue into Social Security comes with a built-in drawback. And those drawbacks may be tricky to overcome.

One option for boosting Social Security revenue is to simply increase the payroll tax rate. Workers currently pay a 12.4% Social Security tax on their first $176,100 of wages, with salaried employees splitting the bill evenly with their employers.

It's possible for lawmakers to raise that 12.4% rate. But that will then burden cash-strapped Americans with even higher taxes they can't afford.

Lawmakers could also opt to raise the $176,100 wage cap on Social Security and impose taxes on higher levels of earnings. But that wage cap is tied to the program's maximum monthly benefit. To keep things equitable, Social Security would potentially have to raise its maximum monthly benefit, thereby eroding that added income.

Finally, lawmakers could push full retirement age for younger workers back a few years. It's currently 67 or anyone born in 1960 or later.

But that idea effectively forces people to work longer. And since many older workers struggle to stay in the workforce, it could create a world of problems for people who can't continue at their jobs.

All told, lawmakers have a pretty daunting task ahead of them to prevent Social Security cuts. But the good news is that there are solutions. Lawmakers will just have to think them through carefully, and perhaps get creative to avoid a broad reduction in Social Security benefits.

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