Romina Boccia and Ivane Nachkebia
Voter turnout has long been the highest among senior Americans, making them one of the most influential voting groups in the country. Politicians, well aware of this, often try to cater to their preferences. The latest example of this trend is Congress’s decision to expand the already larger standard deduction for seniors—who are the wealthiest age group—through 2028. More distressingly, both parties seem to have embraced an approach to Social Security that avoids necessary structural reforms and instead promises to preserve benefits at unsustainable levels. The 2024 Republican Party platform pledged to “not cut one penny from Medicare or Social Security.” Similarly, the 2024 Democratic Party platform rejected any cuts in Social Security benefits and even promised to expand them. While these statements resonate with senior voters, they come at a high cost for younger generations.
According to the latest report from the Social Security Trustees, Congress would need to raise the payroll tax rate immediately and permanently by 3.65 percentage points—from 12.4 to 16.05 percent—to close the program’s $25 trillion, 75-year funding shortfall and pay benefits as scheduled under current law. For a hypothetical median worker entering the workforce at age 22 in 2025, this tax increase would reduce lifetime earnings by more than $110,000 in present value terms over a 45-year career (see the appendix for our methodology). That’s roughly equivalent to giving up 20 months of pay at the worker’s average monthly wage.
But even this tax hike would fall short of a lasting solution. While it might extend solvency for 75 years, it would still leave today’s younger workers vulnerable—paying higher taxes throughout their careers only for Social Security to face steep funding shortfalls late in their lives. To understand the full scope of the challenge, it’s helpful to look beyond the 75-year window.
The Trustees also present projections over what they call the “infinite horizon,” estimating the total gap between promised benefits and expected tax revenues for all generations—past, present, and future. On this basis, Social Security faces a staggering $73 trillion shortfall in present-value terms. Closing this massive shortfall while keeping current law benefits unchanged indefinitely would require an immediate and permanent payroll tax increase of 5.2 percentage points, from 12.4 to 17.6 percent. For the median worker described above, this would translate into a lifetime earnings loss of about $157,000, or the equivalent of 29 months of pay at their average monthly wage.
Figure 1 shows the lifetime payroll tax burden for the median worker from 2025 to 2070 under current law and two alternative solvency scenarios. The dips in annual tax burdens reflect variations in earnings over the course of a median worker’s career.
We can also examine how these payroll tax increases would affect a worker earning the median wage today. A full-time, year-round worker earning $66,636 in 2025 would see an annual tax increase of $2,432—from $8,263 to $10,695—to keep Social Security solvent over 75 years. To make Social Security permanently solvent, the annual tax hike would climb to $3,465, for a total of $11,728 per year (see Figure 2). That’s roughly equivalent to losing two weeks of pay for 75-year solvency and about 2.7 weeks of wages under the infinite horizon scenario.
The severity of what these payroll tax rate increases would mean for most American households explains why neither party has endorsed raising the rate to cover the cost of full benefits. No politician running for (re-)election would want to be on the record for raising payroll taxes by $2,432 or $3,465 for the typical US worker.
This raises the 25-trillion-dollar question: If raising the payroll tax rate sufficiently to cover the cost of currently legislated benefits is untenable, how then will politicians avoid benefit cuts when Social Security’s trust fund becomes insolvent in 2033? Remember, both parties promised not to cut benefits.
Should Congress decide to continue borrowing to cover Social Security’s cash-flow deficits beyond 2033, US bondholders may demand higher yields in response to a clear abdication of fiscal responsibility—driving up interest costs and increasing the risk of a full-blown debt crisis. This approach could also result in higher inflation down the road, with the US government eventually coming to rely more heavily on the Fed for financing its unsustainable deficit spending instead of making necessary fiscal corrections.
Even eliminating the Social Security tax cap, making all earned income subject to payroll taxes, won’t solve the program’s financial issues over the long term. As the Manhattan Institute’s Jessica Riedl has detailed, eliminating the payroll tax cap would only cover half of the long-term funding shortfall and would involve a massive marginal tax increase on the upper middle class, making such a proposal politically and economically challenging. Specifically, eliminating the cap would push the top marginal federal labor income tax rate above 50 percent and the average top state, local, and federal rate to almost 60 percent, which would almost certainly be on the wrong side of the Laffer Curve (i.e., above the revenue-maximizing level). Importantly, eliminating the cap would generate temporary surpluses that Congress is unlikely to lock away for paying out future program benefits, instead spending the revenues elsewhere. As these surpluses would still be credited to the program’s trust fund, the Treasury would later need to repay what Congress spent, most likely through trillions of new borrowing, as past experience suggests.
The bottom line is that promises to keep Social Security benefits exactly as currently legislated are immensely expensive for younger workers, whether Congress tries to levy additional taxes on all workers or only on those with earnings above the payroll tax cap. Constituents should therefore take any electoral promises that Social Security can somehow be sustained without any changes to benefits with a heap of salt. Social Security reform is coming. The real question is how this generation will balance the promise to keep seniors out of poverty in old age with keeping the American dream alive for younger generations.
Our forthcoming book, Reimagining Social Security: Global Lessons for Retirement Policy Changes, explores this challenge and shows that meaningful reform is possible. Drawing on international experiences—from Canada, Germany, New Zealand, and Sweden—it presents real-world examples of how other nations have successfully stabilized and modernized their pension systems to reflect today’s demographic and economic realities. These case studies offer valuable lessons for the United States as it faces the urgent task of bringing Social Security into the 21st century.
For a high-level summary of the book’s key insights, read our recent policy analysis. And sign up here for an exclusive subscriber chat, open to paid subscribers of the Debt Dispatch, Cato partners, congressional staff, and federal agency personnel.
Appendix: Methodology
The blog’s findings are based on a methodology developed by Krit Chanwong, a Quantitative Research Associate at the Cato Institute. Chanwong designed and implemented the approach used to estimate the payroll tax burdens and lifetime earnings effects presented here.
Simulating Lifetime Earnings
To simulate lifetime earnings, we assume that individuals work for 45 years, beginning at age 22 and retiring at the full retirement age of 67. Using the Social Security Administration’s 2006 Earnings Public-Use File (a one percent sample of all earning histories), we:
1. Bootstrapped 10,000 lifetime earnings and assigned each bootstrapped sample a year of labor force entry.
2. Adjusted earnings by the average wage index (AWI) intermediate scenario projections provided by the Social Security Administration for each successive year.
3. Calculated the net present value of lifetime earnings and multiplied it by the implied losses for a 75-year and infinite horizon.
The median worker in each cohort is defined as the individual with the median level of total lifetime earnings in present value terms.
Note that we discount lifetime earnings by 4.7 percent, which reflects the Social Security Trustees’ projected average yield on Treasury securities with maturities longer than four years (2.3 percent) plus their ultimate assumed inflation rate (2.4 percent). We also estimated lifetime earnings using:
- 7.6 percent discount rate: Based on 2024 average annual 1‑year Treasury yields (5.2 percent) plus 2.4 percent inflation.
- 2.4 percent discount rate: Discounting only for inflation.
We repeat this procedure 20 times (five times per discount rate) for each generation entering the workforce from 2025 to 2045, yielding 200,000 earning histories for each generation. All monetary values are nominal.
Discount Rate Sensitivity
Lifetime earnings losses vary significantly depending on the discount rate used. See below the estimated losses for a hypothetical median earner under different discount rate assumptions:
2.4 percent discount rate:
- 75-year horizon: $190,755
- Infinite horizon: $271,760
7.6 percent discount rate:
- 75-year horizon: $61,234
- Infinite horizon: $87,237
Choice of Discount Rates
The choice of discount rates is always subjective. We provide a range of discounting assumptions to account for different perspectives. Nevertheless, we believe 4.7 percent to be the most representative discount rate in this analysis. This reflects an assumption that future earnings are relatively secure and predictable. Accordingly, the main factor to adjust for is the time value of money, which is best represented by the yield on long-term US Treasuries, which are “risk-free.” This approach is supported by precedent: the Supreme Court has held that the appropriate discount rate to use for wrongful death lawsuits is the yield on “the best and safest investments.” Our choice of discount rate is also consistent with Office of Management and Budget (OMB) practices and other studies on Social Security.
