The Social Security trust funds are projected to be exhausted by 2034. If the government doesn’t find a solution to increase the program’s funding, this could lead to substantial benefit cuts. Raising Social Security payroll taxes is often suggested, but it is generally unpopular because it would leave workers with less money to spend.
However, one tax-increasing reform has garnered significant support from Americans across the political spectrum. Currently, most workers pay Social Security payroll taxes on their entire income, but high earners are an exception. In 2024, only the first $168,600 of a person’s income is subject to these taxes.
Income beyond this amount is not taxed for Social Security purposes and does not contribute to increasing the individual’s retirement benefits. Many believe high earners should pay more Social Security taxes to help sustain the program. One proposal suggests eliminating the ceiling on Social Security payroll taxes, making everyone pay the 12.4% tax—split evenly between employee and employer—on all their wages.
An alternative proposal suggests a “donut hole” approach. Under this system, the Social Security payroll taxes would be eliminated for income over the $168,600 ceiling (adjusted annually) and reinstated for those with annual wages over $400,000. For example, someone earning $200,000 annually would only pay taxes on the first $168,600 of their income.
Donut hole gains bipartisan approval
However, if someone earned $450,000, they would pay Social Security payroll taxes on their first $168,600 and on the $50,000 over the $400,000 mark. A recent University of Maryland study surveyed adults in six key swing states for the 2024 election.
It found that a majority strongly supported the “donut hole” approach. 87% supported this idea, with close percentages among Republicans, Democrats, and Independents. Despite its popularity, this reform alone would not ensure Social Security’s future solvency.
The University of Maryland’s study indicates that it would reduce the funding shortfall by about 60%. Therefore, the government would need to implement additional strategies to secure Social Security for future generations. These could involve increasing the program’s funding and reducing the benefits payable to retirees, disabled workers, surviving spouses, and their families.
The “donut hole” approach is appealing because it lessens the financial burden on the average worker, unlike other proposals like increasing the payroll tax rate or raising the full retirement age, both of which would impact workers directly by reducing their disposable income or increasing early claiming penalties. Finding a comprehensive solution is complex and requires balancing various interests. Government decisions will be crucial in addressing Social Security’s funding issues in the next few years.
Meanwhile, workers can best prepare for potential changes by saving independently to reduce reliance on Social Security benefits.
