If you're concerned about the future of Social Security—whether you're already receiving benefits or are still a few decades away from retirement—you're not alone. Headlines about the depletion of the Social Security Trust Fund by 2035 have raised valid concerns. However, understanding how Social Security is funded, what potential changes are on the horizon, and how these might impact you can provide clarity and reduce worries about what's next for Social Security.
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In this article, we’ll break down the key issues surrounding Social Security’s future, including:
How Social Security is funded
What the 2035 depletion date really means
Possible solutions for closing the Social Security funding gap
Practical tips for near-retirees and younger workers alike
Let’s dive in.
How is Social Security Funded?
Social Security funding primarily comes from payroll taxes, formally known as FICA taxes. Here’s how it works:
Payroll Taxes: Payroll taxes, which amount to 12.4% of wages (up to an income cap of $168,600 in 2024), are split equally between employees and employers. Self-employed individuals pay the entire 12.4%.
No Individual Account: Unlike personal retirement accounts, such as 401(k)s or IRAs, the Social Security contributions you make today aren’t stored in an account specifically for you. Instead, they’re used to fund current Social Security benefits for retirees, survivors, and those with disabilities.
Most Social Security benefits paid today come directly from these payroll taxes, while any shortfall is supplemented by the OASDI Trust Fund (Old Age, Survivors, and Disability Insurance Trust Fund).
Why the 2035 Depletion Date Isn’t as Alarming as It Sounds
Between 1984 and 2009, Social Security had a surplus: payroll taxes collected exceeded benefits paid. This surplus was deposited into the OASDI Trust Fund. However, since 2010, outflows have exceeded inflows, causing the trust fund to shrink each year.
If current conditions continue, the OASDI Trust Fund is projected to be fully depleted by 2035. But here’s what that actually means for future benefits:
Not a Complete Shutdown: Social Security will still receive funds from ongoing payroll taxes, covering about 83% of scheduled benefits through 2098. This means that, even if no policy changes are made, beneficiaries would receive approximately 80% of their benefits from 2035 onward.
Future Shortfalls: After 2098, payroll taxes will likely still cover about 73% of scheduled benefits, so while reductions might occur, they won’t be as drastic as many fear.
The key takeaway? Even if the trust fund depletes, Social Security will still have funds from payroll taxes to pay out most of its benefits.
What Happens if Social Security Benefits Are Cut?
Assuming no policy action is taken, starting in 2035, retirees might see a 20% cut in benefits. For instance, someone receiving an average benefit of $1,919 today would see a monthly reduction of around $400.
While any reduction is significant, it's important to note that Congress has proposed a range of potential solutions to avoid this worst-case scenario. Let’s look at some of the options being discussed.
Potential Solutions to Close the Social Security Funding Gap
Several proposals aim to address the potential funding shortfall, and they fall into two main categories: increasing revenue and reducing benefits. Here’s a closer look:
1. Single-Policy Solutions on the Revenue Side
Increase Payroll Tax Rate: A one-time increase of 3.33% to the payroll tax rate (from the current 12.4% to 15.74%) could fully fund Social Security through 2098. This increase might be split between employers and employees, although details are still uncertain.
Eliminate Income Cap on Payroll Taxes: Currently, income over $168,600 isn’t taxed for Social Security. Removing this cap would affect higher earners the most and could cover around 60% of the funding gap. Some proposals suggest combining this with a smaller payroll tax increase to bridge the remaining shortfall.
2. Single-Policy Solutions on the Benefit Side
Reduce Benefits by 20.8%: A one-time, across-the-board cut of 20.8% in Social Security benefits would be sufficient to fill the gap. While effective, this approach would be politically challenging, as it would impact current and future beneficiaries.
Future Benefit Reductions Only: Another option is to cut benefits only for future retirees (those claiming after 2024), reducing their benefits by 24.8%. While this preserves benefits for current retirees, it might place a larger burden on younger workers.
3. Combined Policy Solutions
For more flexibility, policymakers are also considering combined solutions, such as:
Removing the Income Cap + Small Payroll Tax Increase: This approach would eliminate the wage cap, taxing all earned income while applying a smaller increase (about 1.35%) to the payroll tax rate.
Increase the Full Retirement Age: Raising the retirement age from 67 to 68 or 69 could help address outflows, though it might not be popular with those nearing retirement.
Adjust Cost-of-Living Increases: A change in how Social Security calculates annual cost-of-living adjustments (COLA) could result in lower yearly increases, reducing long-term outflows.
While none of these options is without drawbacks, a combination of these approaches would be less drastic and might be more politically viable.
What Current and Future Retirees Should Keep in Mind
Regardless of your stage in life, it’s helpful to understand how potential changes to Social Security might impact you. Here are some considerations based on your retirement timeline.
For Those Nearing or in Retirement
If you’re close to retirement or already receiving Social Security, keep in mind:
Most Benefits Are Funded by Payroll Taxes: Even under current projections, payroll taxes alone will cover about 80% of benefits after 2035.
Policy Changes May Not Impact You: Many proposed solutions focus on future beneficiaries or increased payroll taxes, which may have a limited impact on current retirees or those near retirement.
For Younger Workers and Future Retirees
Younger workers, especially those decades from retirement, often fear they won’t receive Social Security benefits at all. However, under the worst-case scenario, projections suggest you would still receive over 70% of scheduled benefits.
Proactive Planning Tips:
Invest in Additional Retirement Accounts: Maximize contributions to retirement accounts like 401(k)s, IRAs, or Roth IRAs. Doing so builds a personal retirement fund that supplements Social Security benefits.
Diversify Your Income Sources: Diversifying your retirement income sources—through investment accounts, real estate, or part-time work—can reduce reliance on Social Security.
A Final Word on Social Security’s Future
While the headlines may seem dire, the reality is more optimistic. Thanks to ongoing payroll taxes, Social Security isn’t going to vanish—even in the absence of reform. Policymakers are actively discussing various solutions, and it’s likely that a blend of changes will keep the system solvent for future generations.
Whether you're a near-retiree or decades from retirement, there are steps you can take now to strengthen your financial future.
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About the author
Jake Skelhorn
Jake is a CFP Professional with a focus on planning for both traditional and early retirement. He’s a Florida native, growing up in Fort Lauderdale and now residing in Jacksonville with his husband Chris and their 120-lb “puppy” Barli. Jake enjoys cooking (favorite cuisine to make is Thai), traveling, and spending time with friends and family as much as possible.
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