Should Social Security Raise the Payroll Tax Rate?

Social Security helps millions of retirees make ends meet. But the program is in long-term financial jeopardy. In order to prevent a future financial crisis for Social Security, some believe that raising the payroll tax rate for Social Security taxes is the best way to keep the program fully funded.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, examines the arguments for and against raising the Social Security payroll tax. On one hand, Dan notes that a relatively small increase would go a long way toward fixing Social Security's financial problems. A gradual rise from its current level of 6.2% to 7.2% over the next 20-25 years would eliminate half of the expected shortfall, according to government estimates, while a jump to 7.6% would eliminate it entirely.

However, Dan also observes that any increase would also hurt employers, which have to bear their own burden for Social Security taxes. In addition, some argue that the regressive nature of the tax makes it inappropriate to raise rates, as those who earn above the wage cap for Social Security tax pay no extra amount at all beyond the cap. Dan concludes that with no easy answers, a balanced approach considering multiple solutions is most likely to be the final solution.

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