Social Security faces a growing funding gap, but fixing it through a major payroll tax increase could create another financial problem for millions of workers. An economist at the Cato Institute says raising the payroll tax enough to fully cover future benefits could add thousands of dollars in annual costs for a typical worker and employer.

The debate comes as Social Security spends more on benefits than it collects from payroll taxes. The program has increasingly relied on its trust fund to cover the difference. Without changes from Congress, that reserve is projected to run out in 2032.

At that point, Social Security could face an estimated 22% reduction in benefits.

A Higher Payroll Tax

Payroll taxes provide most of Social Security's funding. Workers and employers generally divide the 12.4% tax equally, while self-employed people pay the full amount.

The tax rate has changed significantly since Social Security began in 1937. It was only 2% at the program's launch. Today, policymakers are considering whether another increase could help close the funding gap.

Instagram | tamuecon | Romina Boccia states most workers cannot afford extra costs because they lack $400 in emergency savings.

The Cato Institute estimates that raising the payroll tax from 12.4% to 17% could restore enough revenue to keep Social Security paying full benefits for the foreseeable future.

However, that change would come with a noticeable cost. For a median worker earning about $62,000 per year, Cato estimates an additional $2,600 to $3,000 in annual payroll taxes. The increase would generally be shared between the worker and employer.

Romina Boccia, director of budget and entitlement policy at Cato, said many households would have trouble handling that extra expense.

"Most of the individuals we're talking about ... don't even have $400 set aside to respond to an emergency," Boccia told CBS News. "It's financially impossible for most workers to bear that additional cost, so Congress will need to look at other options."

The concern is especially important for workers who already have limited savings. A higher payroll deduction could reduce the money available for housing, food, debt payments and retirement savings.

Should the Tax Cap Change?

A major payroll tax increase is not the only proposal being discussed. Another option would change the amount of income subject to Social Security taxes.

For 2026, the Social Security taxable wage base is $184,500. Workers generally do not pay the Social Security portion of payroll taxes on earnings above that amount.

Removing or increasing the cap would make higher earners pay Social Security taxes on more of their income. The tax rate on wages below the existing cap would not need to increase under such a plan.

The idea has received support from lawmakers across party lines. In July, Democratic Sen. Elizabeth Warren of Massachusetts and Republican Sen. Bernie Moreno of Ohio called for lifting the payroll tax cap. They argued that the change could create a system in which higher earners contribute a similar share of their income as low- and middle-income workers.

Public support also appears relatively strong. A 2025 Bipartisan Policy Center survey of more than 4,000 Americans found that 65% of Democrats and 62% of Republicans supported raising or removing the cap. The survey also found that a majority of households earning more than $200,000 favored the idea.

Still, Boccia warned that the policy could produce unintended effects. In some states, higher taxes could push the top marginal tax rate for high-income households above 60%. Some high earners could respond by retiring earlier rather than accepting a much larger tax burden.

Benefit Cuts Could Play a Role

Many Social Security policy experts expect that fixing the program will require more than one change. Options could include raising additional revenue and reducing future benefits.

Possible revenue measures include a modest payroll tax increase or a higher taxable wage cap. Benefit changes could involve gradually increasing the retirement age or limiting benefits for higher-income households.

Boccia argues that benefit reductions should receive more attention. She noted that Social Security was created 91 years ago, long before 401(k) plans, target-date funds and automatic enrollment became common parts of retirement planning.

Despite those changes, millions of Americans still approach retirement with limited savings.

"We need an approach that's much heavier on the benefit reduction side because, if you look at how the program works, the key driver of the shortfall is that benefits are growing more generous over time," Boccia said.

The Debate Over High Earners

Instagram | Kampus Production | Resolving Social Security's funding gap will require Congress to either raise taxes, alter benefits, or blend both.

Higher earners can receive larger Social Security payments because benefits are tied partly to lifetime earnings. For people retiring in 2026, the maximum monthly benefit is $5,181, which equals more than $62,000 per year.

People who qualify for the maximum payment typically earned at or above the taxable income limit for many years.

Boccia has questioned whether these benefit levels make sense compared with public retirement systems in other countries.

"A dual high-earning household can collect $120,000 annually from Social Security, which is excessive in comparison to most other nations' public retirement benefits," she said.

Another proposal would link the retirement age to changes in life expectancy. Since Americans are living longer than previous generations, supporters argue that the normal retirement age could gradually rise as longevity increases.

That approach, however, could create problems for workers who cannot remain employed until a higher retirement age. The median U.S. retirement age is 62, according to the Transamerica Center for Retirement Studies.

The organization has also found that many Americans retire earlier than expected. Layoffs, health problems and other financial or personal setbacks can force people out of the workforce before they are ready.

A Simpler Benefit Formula

Boccia favors another approach: a flat Social Security benefit that provides workers with a predictable amount they can plan around and supplement with personal savings.

The current benefit formula is complex. Workers may struggle to understand how their earnings, claiming age and other factors will affect their future payments.

"The current formula is so complex that most people have no idea what to expect, so they can't reasonably plan for it either," Boccia said.

A simpler system could make retirement planning easier, although changing the benefit structure would also create difficult political and financial decisions.

Social Security's funding gap gives Congress several difficult options. Lawmakers could raise payroll taxes, increase or remove the taxable wage cap, adjust future benefits, or combine several changes. Each approach would affect different groups of Americans, so finding a workable solution will require careful consideration.

The projected 2032 trust fund depletion date makes the issue more pressing. If Congress does not act, benefits could face significant reductions. Any reform will need to protect the program's long-term finances while keeping the costs manageable for workers, employers and retirees.