When Will Social Security Run Out?
Millions of Americans rely on Social Security to maintain financial stability, but its future is uncertain. Social Security’s trust fund reserves are expected to run out by 2035, based on the May 2024 Trustees’ Report (source).
In order for the program to continue beyond this timeframe, significant changes may be required. However, this does not mean that it will cease to exist.
When Will Social Security Run Out? Financing of Social Security
Employees and employers each contribute 6.2% of their income up to a cap that will increase from $168,600 to $176,100 in 2025. Social Security operates on a pay-as-you-go basis.
Self-employed people pay the full 12.4% (source). The contributions are used to fund retiree benefits, with 85% going to the retirement and survivors’ fund and 15% to the disability fund. Over the past few years, however, benefit payouts have exceeded revenues, forcing the trust fund to rely on its reserves to meet benefit obligations.
Is Social Security running out of funds?
There are several factors contributing to the looming shortfall:
- Based on demographics: By 2033, there will be just 2.4 workers per beneficiary, down from 3.4 in 2000 due to the aging baby boomer generation.
- Increasing life expectancy: The advancements in healthcare have made it possible for retirees to live longer and collect benefits for a longer period of time.
- Pressures from the economy: The Social Security trust fund will be further depleted by 2033 as the shortfall will reach $332 billion.
The Importance of Social Security
Retirement, people with disabilities, and their families rely on Social Security for financial support. As a result, poverty rates among older adults would skyrocket if this program did not exist. It accounts for roughly half of the income for households headed by individuals aged 62 and older and up to two-thirds for households with lower incomes.
It serves as a cornerstone of retirement planning, alongside 401(k)s and IRAs and other employer-sponsored retirement plans. The AARP survey from 2024 found that 90% of Americans aged 50 and older view Social Security as vital.
Also check: How Do I Get The $16728 Social Security Bonus
After 2035, what will happen?
It is likely that Social Security’s trust fund will be exhausted by 2095. However, benefits would be reduced to 83% of their scheduled amount if no action is taken.
Solutions for Congress
There are a number of potential solutions Congress can take to prevent the depletion of the trust fund.
- Increasing revenue
- An increase in payroll taxes.
- The income cap subject to payroll taxes should be raised or eliminated.
- Earnings from investments can be taxed in addition to other forms of income.
- Benefits reduction
- Full retirement benefits should be increased at an older age.
- Increasing benefits for higher-income individuals.
- The reduction of annual Cost of Living Adjustments (COLAs).
- Approaches that combine
- Enhancing revenue while reducing benefits moderately.
- Mitigating poverty impacts by expanding Supplemental Security Income (SSI).
The last major reform came in 1983, when bipartisan legislation increased retirement ages and introduced taxation on benefits. Today’s challenges will require similar reforms.
Adjustments for Cost of Living (COLA)
Based on changes in the Consumer Price Index, Social Security payments are adjusted annually for inflation. For 2025, the COLA is 2.5%, resulting in an average monthly increase of $49. While COLAs help beneficiaries keep pace with rising costs, they also put financial strain on the trust fund.
Social Security Income Supplements
As Social Security’s future is uncertain, individuals are encouraged to diversify their retirement income through savings and investments:
- 401(k) Plans: A tax-deferred savings account sponsored by an employer. Most employers match employees’ contributions, maximizing savings.
- IRAs: IRAs offer tax advantages and flexibility. Traditional IRAs defer taxes, while Roth IRA withdrawals are tax-free.
Compound interest can significantly boost retirement funds over time, even if contributions are modest.
A shortfall’s potential impacts
Poverty rates have increased
As a result of the depletion of the trust fund, low-income beneficiaries might see their benefits drop by $5,900 in inflation-adjusted dollars by 2045, which would increase poverty rates among Social Security beneficiaries by more than 50%.
Racial and ethnic disparities
Black and Hispanic beneficiaries may see poverty rates rise by 6 percentage points in comparison with white beneficiaries, who may face an increase of 3 percentage points.
How can Congress prevent insolvency?
Raise Revenue
- The payroll tax cap should be increased: Higher incomes could be taxed beyond the current cap, extending the program’s viability substantially.
- Payroll taxes should be raised: The funding gap could be bridged by increasing the 12.4% rate incrementally.
- Sources of other income subject to tax: Another option is to include investment income in the Social Security tax.
Benefits should be reduced
- Increasing the full retirement age: The payouts could be reduced if it is gradually raised beyond 67.
- Increase benefits for low-income workers: Lower-income beneficiaries could be protected through targeted reductions.
- Reduce COLAs: The financial decline of the program could be slowed by smaller annual increases.
Combining approaches
The most politically viable solution may be to combine moderate tax increases and benefit adjustments.
Conclusion
There are numerous strategies available to prevent a crisis in Social Security, even though the trust fund is projected to run out by 2035. For additional information, visit the Trustees’ Report at the Social Security Administration. Understanding the program’s financial challenges and preparing for potential changes will help ensure a secure retirement.
