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Social Security is one of the most discussed (and misunderstood) parts of our financial system. Many Americans aren’t sure if it will still be there when they retire, while others already collecting benefits worry about possible reductions.
So what is the true state of Social Security based on the most recent data and analysis? And what does this mean for your financial future?
What is the Social Security Trust Fund?
Social Security is mainly funded by payroll tax – In particular the 12.4% combined tax paid by both employees and employers. These funds go into two separate trust funds:
- OASI (Old Age and Survivors Insurance) – This fund pays retirement and survivor benefits.
- From (disability insurance) – This fund covers disability benefits.
When people refer to the “Social Security Trust Fund,” they are often referring to a combined total of the two.
How healthy is the trust fund?
The combined trust fund was held from the end of 2024 $2.7 trillion in reservesbut it shrinks. The program will pay out in 2024 $1.48 trillion in benefits and administrative costs, while recording alone $1.42 trillion in income. That left a shortage of $67 billionwhich had to be covered by dipping in the reserves.
The trust fund has been running a deficit for several years, and unless action is taken, it is expected to remain that way exhausted by 2034.
What happens if the trust fund runs out?
Here is the main point that surprises many people: Even if the trust fund is depleted, Social Security will not disappear.
Because the program is largely funded by current payroll taxes, About 81% of planned benefits would still be due in 2034 and beyond under current assumptions.
That figure is expected to slowly drop to approx 72% by the end of the century If no further action is taken. So while there is a funding gap, it is not a cliff and it is far from a total collapse.
Why does this happen?
There are a few structural reasons for the financing imbalance:
- Demographics: More people are retiring than are entering the workforce, especially as the baby boomers age.
- Longer lifespan: Retirees collect benefits for more years than previous generations.
- Lower birth rates: Fewer workers support more retirees.
- Slow wage growth: This affects the amount collected through payroll taxes.
What can be done to fix it?
Congress has several options and it is likely that the solution will involve a mix of different strategies. Here are the most discussed:
1. Increase payroll taxes
Increasing the combined payroll tax rate of 12.4% to 16.05% would fully fund the system until 2099. If Congress waits until 2034, the required increase would be even higher.
2. Reduce the benefits
An immediate cut of 22.4% for all benefits (including current recipients) would also restore solvency until 2099. Alternatively, a 26.8% cut for only New beneficiaries could work.
These are politically unpalatable, but they demonstrate the scale of change that is needed.
3. Raise the full retirement age
Raising the full retirement age from 67 to 68 could close it 13% of the funding gap. Larger increases would have a greater effect.
4. Change the cola (cost of lifetime adjustment) formula
Switch to the “chained CPI” (That reflects lower inflation adjustments) would reduce annual benefit increases and close 19% of the funding gap.
On the other hand, using “CPI” (That reflects senior-specific costs) would do that increase Benefits but also deepen the shortage.
5. Lift the payroll tax from the payroll administration
Currently, wages above $176,100 are not taxed for Social Security purposes. If that cap were eliminated or increased (for example, taxing wages above $400,000), it could significantly improve the system’s solvency.
However, proposals that also provide benefits for these additional taxes provide less net financial improvement than those that do not.
Realistic expectations: a mixed approach
Most analysts expect Congress will not choose a single solution, but rather a combination of smaller adjustments. A likely package could be:
- A modest increase in payroll taxes
- A gradual increase in the full retirement age
- Slower benefit growth for high earners
- Adjusted cola calculations
Some proposals could also include benefit increases for lower-income retirees as a way to balance the impact of budget cuts or tax increases.
What this means for you
Depending on your age and income level, the potential impact of these changes will vary:
If you work
If you’re still in your working years (especially if you’re earning above the current wage cap), you could face higher taxes in the future. It is wise to:
- Model a scenario where you receive 72% – 81% of your planned benefit.
- Consider the impact of possible wage tax increases.
- Maximize retirement savings outside social security.
As you approach retirement
You’ll likely receive most of your expected benefits, but possible changes to the Coke or benefit formula could affect your long-term retirement income. Model different inflation assumptions (for example, 0.3% lower than your base Coke assumption).
If you are already retired
It is unlikely that your benefits will be reduced. Politically, this is the group least likely to be affected. However, Cola adjustments may still apply.
The bottom line
Social Security isn’t going away, but it is under stress. Without changes, the trust fund will run dry in about a decade and benefits would automatically be reduced by about 19%.
While that’s not ideal, it’s far from the worst-case scenario that many people imagine. The program still has strong fundamentals, especially since it is funded by ongoing payroll taxes.
The most likely outcome is a series of policy adjustments that spread the impact across multiple areas, such as taxes, benefits, and eligibility, to restore long-term balance.
As always, good financial planning can help you stay ahead of potential changes and make smart decisions about your future.
This article was Originally published here and is republished on Wealth with permission.
About the author
Michael Reynolds, CFP®, CSRIC®, AIF®, CFT-I™
Progressive Financial Planning & SRI/ESG Investing.
Michael Reynolds, CFP®, CSRIC®, AIF®, CFT-I™
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