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[Prefer to listen? You can find a podcast version of this article here: E275: The Truth About the Future of Social Security]

Social Security is one of the most discussed (and misunderstood) parts of our financial system. Many Americans are unsure whether it will still be there when they retire, while others who are already collecting benefits are concerned about possible reductions.

So what is the actual 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 funded primarily through payroll taxes — specifically, the 12.4% combined tax paid by both employees and employers. These funds go into two separate trust funds:

1. OASI (Old-Age and Survivors Insurance) — This fund pays retirement and survivor benefits.
2. DI (Disability Insurance) — This fund covers disability benefits.

When people refer to the "Social Security trust fund," they’re often referring to a combined total of these two.

How Healthy Is the Trust Fund?

As of the end of 2024, the combined trust fund held about $2.7 trillion in reserves, but it's shrinking. In 2024, the program paid out $1.48 trillion in benefits and administrative costs, while taking in only $1.42 trillion in income. That left a deficit of $67 billion, which had to be covered by dipping into the reserves.

The trust fund has been running a deficit for several years, and unless action is taken, it’s expected to be depleted by 2034.

What Happens If the Trust Fund Runs Out?

Here’s the key point that surprises many people: Even if the trust fund is depleted, Social Security will not disappear.

Because the program is largely funded by ongoing payroll taxes, about 81% of scheduled benefits would still be payable in 2034 and beyond under current assumptions.

That figure is expected to slowly decline to about 72% by the end of the century if no further action is taken. So while there is a funding gap, it’s not a cliff, and it’s far from a total collapse.

Why Is This Happening?

There are a few structural reasons for the funding imbalance:

• Demographics: More people are retiring than entering the workforce, especially as baby boomers age.
• Longer lifespans: Retirees are collecting benefits for more years than previous generations.
• Lower birth rates: Fewer workers are supporting more retirees.
• Slow wage growth: This affects the amount collected through payroll taxes.

What Can Be Done to Fix It?

Congress has a variety of options, and it’s likely that the solution will involve a mix of several strategies. Here are the most commonly discussed:

1. Increase Payroll Taxes

Raising the combined payroll tax rate from 12.4% to 16.05% would fully fund the system through 2099. If Congress waits until 2034, the required increase would be even higher.

2. Reduce Benefits

An immediate 22.4% cut to all benefits (including current recipients) would also restore solvency through 2099. Alternatively, a 26.8% cut for only new beneficiaries could work.

These are politically unpalatable, but they demonstrate the scale of change needed.

3. Raise the Full Retirement Age

Raising the full retirement age from 67 to 68 could close about 13% of the funding gap. Larger increases would have a greater effect.

4. Change the COLA (Cost of Living Adjustment) Formula

Switching to the "chained CPI" (which reflects lower inflation adjustments) would reduce annual benefit increases and close about 19% of the funding gap.

On the flip side, using "CPI-E" (which reflects senior-specific expenses) would increase benefits but also deepen the deficit.

5. Lift the Payroll Tax Cap

Currently, wages above $176,100 are not taxed for Social Security. If that cap were eliminated or raised (say, taxing wages above $400,000), it could significantly improve the system’s solvency.

However, proposals that also offer benefits for these additional taxes provide less net financial improvement than those that don’t.

Realistic Expectations: A Mixed Approach

Most analysts expect that Congress won’t choose a single fix but rather a combination of smaller adjustments. A likely package could include:

• A modest increase in the payroll tax
• A gradual increase in the full retirement age
• Slower benefit growth for high earners
• Adjusted COLA calculations

Some proposals may also include benefit increases for lower-income retirees as a way to balance the impact of any 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’re Working

If you’re still in your working years (especially if you earn above the current wage cap) you may face higher taxes in the future. It’s wise to:

• Model a scenario where you receive 72%–81% of your scheduled benefit.
• Consider the impact of possible payroll tax increases.
• Maximize retirement savings outside of Social Security.

If You’re Nearing Retirement

You’ll likely receive most of your expected benefits, but possible changes to the COLA or benefit formula could affect your long-term retirement income. Model different inflation assumptions (for example, 0.3% lower than your baseline COLA assumption).

If You’re Already Retired

It’s 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 be automatically reduced by roughly 19%.

While that’s not ideal, it’s far from the worst-case scenario that many people imagine. The program still has strong fundamentals, primarily because it’s 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.