Will Social Security run out? How to prepare for potential changes

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Apr 10

Millions of workers pay Social Security taxes every year in the United States, and when they retire, they'll likely expect to collect their benefits. But the number of people receiving Social Security is outpacing the number of people paying into the program, and by 2035 the Social Security program's trust fund reserves will be depleted. Taxpayer funds will only be able to cover 80% of scheduled benefits, according to an estimate from the Social Security Administration.

Essentially, yes, Social Security's reserve funds will "run out," but the majority of benefits will still be covered by taxpayers. And if Congress adjusts the structure of the program by 2035 through tax increases, benefit reductions or some other method, Social Security may be able to continue providing full benefits.

This isn't the first time this has happened. The Social Security Administration has projected financial shortages before, and in 1983 Congress made changes that helped replenish its reserves.

Here's what to know about the status of Social Security now and how you can prepare for a potential change to its role in your retirement.

How Social Security works now

Social Security is a federal program that pays benefits to retired workers, survivors of workers who have died, certain dependents and those who are disabled. Most U.S. employees and their employers pay into the program (workers and employers each contribute 6.2% of up to $160,200 in yearly earnings in 2023). When workers retire, they then receive benefits that are based largely on their lifetime earnings.

This means the Social Security retirement program — and the benefits that retirees receive — is largely funded by taxes from people who are currently working.

This system, established during the Great Depression, requires the ratio of workers to retirees to stay high enough to fund the benefits. But as the U.S. population ages and there are fewer workers to replace them — due to a decline in the birth rate after the baby boom — that ratio is changing. The structure of Social Security will need to change to reflect it.

What may have to change

In order to keep paying full benefits when the Social Security trust fund reserves run out in 2035, Congress may need to change the revenue sources (how the program makes money), the scheduled benefits (who receives money, when and how much) or both.

According to the Social Security Board of Trustees, either raising the payroll tax by about 4 percentage points for employers and employees, decreasing benefits by 25%, or some combination of both, might ensure that benefits can be paid in full for the next 75 years.

The Social Security Administration has said that future changes to the program are certain, and that those changes should reflect the "desires of each new generation." And as the United States reckons with a significant racial wealth gap, Social Security benefits are part of a greater conversation.

"This program is a major source of wealth for a large percentage of minority groups — we should think about investing more into it, not less," says Geoffrey Sanzenbacher, associate professor of economics at Boston College.

Removing the cap on the amount of wages subject to the Social Security payroll tax, he suggests, would have higher earners paying more into the program and receiving more as well — and could provide a much-needed cushion for more vulnerable beneficiaries.

Preparing for what may be next

"It's important to talk about these things now, while we have time to think about the ramifications," Sanzenbacher says. He adds that if Congress waits until the last minute to make changes, there may not be room to explore options that could work better for more people.

At this point, some workers approaching retirement may wonder if they should apply for Social Security sooner to "lock in" their benefit, just in case. But that might not necessarily be the best choice in the long run, because claiming benefits before full retirement age can mean receiving a smaller monthly payment for the rest of your life.

Waiting until full retirement age or later, on the other hand, is one of the best ways to boost your retirement income. There are also other important factors to consider when planning for your retirement, because full Social Security benefits alone likely aren't enough for most people to live on.

If you're in the financial position to do so, saving more can't hurt, and at a minimum, it might help reduce your worries about the status of the Social Security program as a whole. Putting money into tax-advantaged savings accounts such as an individual retirement account can add to your retirement fund, as can participating in a 401(k) plan if your employer offers one.

"Planning for less generous retirement benefits isn't a bad idea," Sanzenbacher says.

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