Social Security’s Funding Gap: Tax and Benefit Changes That Could Help

Social Security’s projected funding gap could mean smaller benefits for retirees, survivors and disabled workers unless its financing changes. The reserves in the retirement and survivor trust fund are projected to run out in late 2032. At that point, incoming revenue would still cover about 78% of scheduled benefits, according to the 2026 Trustees Report. That points to a significant shortfall, not a complete end to payments.

Surveys suggest many voters want the program protected, even if closing the gap means some people pay more. An October AARP survey of likely voters age 50 and older in 43 competitive districts found that 83% considered Social Security very or extremely important when deciding how to vote. In five closely contested states, 81% of voters surveyed by the Peterson Foundation said they were more likely to support a candidate with a plan to prevent automatic benefit cuts.

More earnings could become subject to payroll tax

One proposal would raise or remove the annual wage cap on earnings subject to Social Security payroll taxes. In 2026, employees pay 6.2% on wages up to $184,500, and employers pay the same share. Self-employed workers generally pay the combined 12.4%. Wages above the cap aren’t subject to this tax.

Sens. Elizabeth Warren of Massachusetts and Bernie Moreno of Ohio have called for eliminating the cap. Another proposal, supported by 72% of voters in a Peterson Foundation survey, would add a 1% payroll tax on earnings above the 2026 cap.

The details matter. A plan would have to establish how the cap changes and whether newly taxed earnings count toward a worker’s future benefit. The Social Security Administration estimates that removing the cap could close about 58% of the 75-year funding shortfall if those earnings don’t increase future benefits. If they do, the estimate falls to about 45%.

A higher payroll tax would reach more workers

The combined Social Security payroll tax rate is 12.4%, split evenly between employees and employers. The administration has modeled a gradual increase of 0.1 percentage points each year starting in 2032. By 2051, the combined rate would reach 14.4%, with each side paying 7.2%. Self-employed workers generally pay both shares.

This approach could close about 33% of the long-range funding shortfall. Because it applies to wages broadly, it would affect workers across income levels, rather than focusing on earnings above the current cap. A worker earning $50,000 a year would pay an additional $500 annually once the employee rate reached 7.2%.

Investment income is another possible source

A proposal modeled by the administration would apply a separate 12.4% tax to some investment income for people with modified adjusted gross income above $200,000 for single filers or $250,000 for married couples filing jointly. The tax would apply to the smaller of a taxpayer’s net investment income or the amount their income exceeds the relevant threshold.

This would be in addition to the existing 3.8% net investment income tax, which generally applies to certain investment income above those thresholds and helps fund Medicare. The proposed revenue would go to Social Security. The administration estimates the approach could close about 30% of the program’s long-range funding shortfall. It would shift some of the burden toward higher-income households with investment income, rather than relying only on taxes on wages.

Benefit increases could change, too

Social Security’s annual cost-of-living adjustment is currently a percentage based on inflation. Because that percentage applies to each person’s monthly benefit, people with larger benefits receive a larger dollar increase.

A flat-dollar adjustment would work differently: each beneficiary would receive the same annual increase, based on the benefit of someone around the 20th percentile of the benefit distribution. People with lower benefits could fare better, while most beneficiaries would receive a smaller increase.

An AARP Public Policy Institute analysis found that 80% of beneficiaries would receive a smaller adjustment under this approach. For 2026, the average retired worker’s estimated monthly increase would have been $34.20, compared with the actual $57.90 adjustment. The effect could build over time: AARP estimated that a hypothetical retiree who began collecting benefits in 1998 would have received about 20% less by 2026 under the flat-dollar method.

An analysis commissioned by the Committee for a Responsible Federal Budget found that giving smaller adjustments to retirees with larger benefits could close about half the long-term funding gap. The administration has also studied reducing annual adjustments by 0.5 or 1 percentage point, which it estimates could close about 24% or 46% of the gap, respectively.

A later full retirement age would affect claiming decisions

The full retirement age is 67 for people born in 1960 or later. Workers can start claiming retirement benefits at 62, but claiming before full retirement age permanently reduces monthly payments. Gradually raising the full retirement age would make that reduction larger for people who claim early.

The administration estimates that raising the age to 68 could close about 11% of the long-range shortfall; raising it to 69 could close about 32%. Supporters point to longer life expectancies and lower program costs. But the effect would vary by person, and 52% of respondents to the Peterson Foundation survey opposed gradually raising the retirement age for younger workers.

Younger workers have a stake in the outcome

People early in their careers may be decades from retirement, but they already pay into Social Security. Depending on which changes are adopted, they could face higher taxes or lower future benefits. At the same time, housing, health care and everyday expenses can make it harder to save, while traditional pensions are less common.

Confidence in future benefits is low among many younger adults. A December 2025 Cato Institute survey found that 34% of Americans under 30 believed Social Security would exist when they retired, while 78% expected to receive less than their full scheduled benefits. A separate Nationwide Retirement Institute survey found that 45% of Gen Z respondents and 39% of millennials thought they would never collect benefits.

Retirement is only one part of the program. Social Security also provides survivor benefits to eligible children and spouses when a working parent dies, as well as disability benefits for eligible workers who can no longer earn a living. That broad reach is part of why funding choices affect households at different life stages.

What households can do now

Payroll taxes and other revenue would continue to fund a substantial share of scheduled benefits after the reserves run out. There is time for changes, but the estimates show that each proposal has trade-offs: some raise taxes, while others reduce benefit growth or increase the age for full retirement benefits.

Workers can review their earnings record and estimated benefits through a Social Security account. Those farther from retirement can use the estimate as a starting point for retirement planning; people nearing retirement can compare benefits at different claiming ages and consider how those payments fit with their other income. The practical takeaway is to plan with current estimates while keeping in mind that future financing changes could affect both contributions and benefits.