Here’s How Much Extra in Taxes You’ll Pay to Keep Social Security Solvent
There’s no question that many retirees and soon-to-be ones often wonder whether Social Security benefit payments will be able to cover their current lifestyle for the years to come.
However, with the consumer price index—the primary indicator of inflation in the United States—steadily pointing north over the past few months, the dollar just doesn’t go far these days. With this in mind, the Social Security program’s cost of living adjustment (COLA) for next year is expected to receive a sizeable boost to the tune of 6.2 percent, according to the nonpartisan senior group the Senior Citizens League. If that happens, it will represent the biggest raise seen in nearly four decades.
But giving out such raises does come with a cost. In fact, according to a recent report released by the U.S. Treasury Department, the Old-Age and Survivors trust fund will only be able to pay the scheduled Social Security benefits until the year 2033, while the Disability Insurance fund has been estimated to be adequately funded through 2057. As for the highly relied upon Medicare’s hospital insurance fund, it is expected to run dry in 2026.
The Treasury Department said in a statement that “the finances … have been significantly affected by the pandemic and the recession of 2020.”
However, this does not mean that Social Security will just vanish. If no changes are made to the current system, the program will be able to pay only seventy-eight percent of benefits as scheduled. For example, for those retirees who are currently receiving $1,500 a month, that amount could be cut to only $1,170.
‘Right the Ship’
What will it take to make the program whole again? According to one finance expert on the Motley Fool, “there is still time to right the ship.”
He continues: “Over the next seventy-five years, the report projects that Social Security’s actuarial deficit will be equal to 3.54 percent of taxable payroll. Currently, Social Security is taxed at a rate of 6.2 percent each for employers and employees, up to a maximum of $142,800 in wages for 2021. This makes the total Social Security tax rate 12.4 percent, so adding 3.54 percent would give us a new rate of 15.94 percent, or 7.97 percent each for employers and employees.”
This all means for an individual who earns $75,000 per year, Social Security tax would rise from $4,650 to nearly $6,000.
AARP also recently noted that the Social Security program—although far from being a perfect system—will remain solvent in the decades ahead.
“As long as workers and employers pay payroll taxes, Social Security will not run out of money. It’s a pay-as-you-go system: Revenue coming in from FICA (Federal Insurance Contributions Act) and SECA (Self-Employed Contributions Act) taxes largely cover the benefits going out,” the group writes.
Ethen Kim Lieser is a Washington state-based Science and Tech Editor who has held posts at Google, The Korea Herald, Lincoln Journal Star, AsianWeek, and Arirang TV. Follow or contact him on LinkedIn.