Congress faces six year deadline to fix Social Security funding

Members of Congress elected in the November 3 midterms will be in office when a critical six year deadline arrives to enact changes to Social Security. Their decisions on tax policy will be pivotal in determining the future of retirement benefits. During the recent campaign season, tax policy became a central issue in the debate over the program's sustainability. Democrats and some Republicans advocated for higher earners to pay more in Social Security payroll taxes, while many Republicans highlighted a new tax deduction for adults aged 65 and older.

These differing approaches come at a crucial moment for reform. Raising payroll taxes could increase revenue flowing into the system, whereas the new senior deduction reduces income taxes for eligible older adults. This reduction can also lower the taxes some beneficiaries pay on their Social Security benefits, thereby decreasing program revenue. The latest projections from Social Security trustees indicate that the trust fund used to pay retirement benefits may begin to deplete in 2032. At that point, only 78% of scheduled benefits would be payable.

Lawmakers have some flexibility in their timing. If the program's retirement and disability trust funds are combined, the depletion date is pushed out to 2034, when 83% of scheduled benefits would still be payable. However, this still represents a reduction for retirees and is approaching quickly. Shai Akabas, vice president of economic policy at the Bipartisan Policy Center, noted that the consequences of waiting have been significant as the funding gap has grown larger.

While midterm candidates largely avoided specific reform details on the campaign trail, raising the payroll tax cap was a popular choice among Democrats. This cap, currently set at $184,500, determines the amount of earnings subject to payroll taxes. Under current rules, workers and employers each contribute 6.2% of pay up to that threshold, while self employed individuals pay 12.4%. The wage cap is scheduled to rise to $192,300 in 2027, adjusting annually to reflect changes in the average wage index.

Following the election, Senator Bernie Sanders of Vermont, who is expected to chair the Social Security subcommittee, stated on social media that his proposal to increase benefits by at least $2,400 per year and scrap the earnings cap would be a top priority. Outgoing Senator Bill Cassidy of Louisiana responded that the plan would impose a 12.4% tax on individuals who are not millionaires or billionaires. Public opinion appears to support higher taxes for high earners, with a February survey finding that 79% of respondents supported raising taxes for wages over $400,000.

Research from the Roosevelt Institute indicates that rising income inequality has meant the payroll tax cap no longer covers the same share of earnings as it did in 1983. The share of earnings covered by Social Security payroll taxes fell to around 83% in 2000 and has mostly stabilized at that level. Despite campaign promises, some experts believe Congress may delay implementing politically unpopular tax hikes. Jessica Riedl of the Urban Brookings Tax Policy Center suggested that lawmakers might wait until closer to 2032, when the trust fund hits insolvency, to address these issues.

The potential impact of changing the cap varies depending on the specific implementation. A September analysis by the Social Security Administration found that eliminating the cap starting in 2027 would eliminate 58% of the long range actuarial balance over 75 years. Applying the 12.4% payroll tax rate to earnings over $250,000 could address 57% of the long range balance, while applying it to earnings over $400,000 would eliminate 53% of the balance, provided there are no corresponding benefit increases.

On the other side of the ledger, the One Big Beautiful Bill Act enacted a temporary senior tax deduction of up to $6,000 per individual for tax years 2025 through 2028. This deduction, dubbed a senior bonus in early legislative drafts, is set to expire in 2028. Lawmakers may decide whether to extend this break. Riedl noted that because 2028 is a presidential election year, neither party may be willing to let senior tax cuts expire while competing for those votes. The White House has claimed that no tax on Social Security is a reality, though the law provides a deduction rather than eliminating taxes on benefits entirely.

Experts note that the new senior deduction affects lower and middle income taxpayers more than eliminating taxes on benefits, which would benefit upper income groups more. The trustees' annual report in June cited the new law as having a substantial effect on the program's financial status, moving the projected depletion date to the fourth quarter of 2032. William McBride of the Tax Foundation explained that the new deduction cuts into funding for the trust fund, making the program more fragile. Under the new rules, 88% of beneficiaries will have exemptions and deductions that exceed their taxable Social Security income, a significant increase from prior years.