Why You Should Care About Social Security's Looming Insolvency, Even If You're Decades Away From Claiming Checks

If you're not currently claiming Social Security benefits, it's easy to feel like the program's looming insolvency isn't something that concerns you. A possible 22% benefit cut in six years may be devastating to a senior who relies heavily upon their checks to cover living expenses. But it may not make much of a difference to you as a working adult, especially if you never expected to get anything from the program.

But what's happening with Social Security does concern you, even if you're decades away from signing up for benefits. Washington isn't likely to allow a 22% cut, and the reforms it enacts to keep the program going could have a direct impact on your finances in the next few years.

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Why fixing Social Security could hurt today's workers

The only way to avoid Social Security benefit cuts is to increase the program's funding. Right now, the bulk of its income comes from the payroll taxes workers owe on the first $184,500 of their earnings in 2026. This tax is currently 12.4%, split evenly between employees and employers for traditionally employed workers. Self-employed workers pay the whole thing on their own.

One possible strategy to address Social Security's dwindling funds is to raise the payroll tax rate on all workers by up to 4.9 percentage points. That would reduce your take-home pay, possibly by thousands of dollars per year.

This isn't guaranteed, but it's definitely possible. It was one of the key strategies the government used when Social Security was in trouble in the 1980s. It's unlikely to be the only change, though.

If Washington employs other strategies to save the program, such as eliminating the ceiling on income subject to Social Security taxes -- a move that would predominantly affect wealthy Americans -- this could reduce the tax increase ordinary workers face.

What this means for you

There isn't much ordinary Americans can do to directly influence Social Security or tax policy, other than write to their Congressional representative and senator to share their thoughts on the issue. But you can start taking steps to prepare yourself for a possible tax hike.

If you don't have much savings, try to build up your emergency fund over the next few years so you're prepared in case a future tax increase makes money tighter. You may also want to allocate more of your savings to retirement if you're able. The more of your own money you're able to put away, the better prepared you'll be in the future, even if Social Security benefits don't go as far as they do today.

Once we know how the government will alter Social Security, you may need to make changes to your budget moving forward. Do this as soon as you can so you aren't caught off guard when the changes take effect.

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