How Social Security’s anticipated shortfall may impact you down the road
Social Security’s outlook continues to raise concerns. Amid talk of insolvency, understanding the status of the program and the options legislators have for addressing its challenges is key for anyone planning for retirement.
First, Social Security is not at risk of bankruptcy. Social Security benefits are funded by payroll taxes collected from today’s workers. It’s a pay-as-you-go system; if workers and business owners are paying payroll taxes, Social Security benefits will be paid.
Insolvency projections and the potential for benefits to be reduced, however, are related to the nation’s changing demographics and the depletion of a reserve fund that for years has helped offset a revenue shortfall.
According to the 2026 Social Security financial report, the reserve fund – specifically the Social Security Old-Age and Survivors Insurance trust fund – is expected to be depleted by the end of 2032. If Congress does not act, incoming revenue would be enough to cover only 78% of benefits, a reduction of 22%.
A separate trust fund, which backstops Social Security disability benefits, is projected to last until 2100.
The program’s long-term outlook continues to evolve as economic conditions, tax policies and legislative actions develop. As a result, projections regarding future benefit payments and reserve depletion may shift from year to year.
For decades, the Social Security system collected more in payroll taxes and other income than the benefits it paid out, creating a reserve. Since the early 2010s, when the program’s costs began exceeding its revenue, it started drawing from reserves.
Today’s baby boomers have a greater life expectancy than those in earlier generations. At the same time, younger generations are getting smaller, meaning fewer workers are paying into Social Security. And a smaller percentage of Americans’ income is subject to the payroll taxes funding Social Security because the earnings of the highest-paid workers have grown faster than those of the average worker.
Sixty-eight million Americans receive Social Security payments each month – it’s the main source of income for people 65 and older – making its future important. To patch the shortfall, Congress has some options.
The most obvious way to increase Social Security funding is raising payroll taxes. Employers and employees currently each pay 6.2% for social security, resulting in a total contribution of 12.4%. Increasing the contribution shared between employers and employees could ensure solvency for many years but may be unaffordable for lower-income workers.
Another option is adding new tax sources. The American Academy of Actuaries has suggested taxing investment income or increasing estate and gift taxes – an idea likely to face resistance.
Additionally, the Social Security tax rate applies to annual wages up to $184,500. Removing that cap and taxing all earned income could eliminate a majority of the shortfall, though the cap was designed to prevent higher taxation that may not justify the benefits. Social Security’s political support comes from the idea that you can receive back a benefit you have paid into; removing the cap could undermine that support.
Another idea is to reduce future benefits for high earners not yet collecting Social Security, based on the assumption they’ll rely on it less. But this alone wouldn’t curb Social Security expenditures enough to address the problem.
Today the full retirement age (FRA) is 66 and two months for those born in 1955, gradually increasing to 67 for anyone born in 1960 or later. Some lawmakers propose raising the FRA to 70 to reflect today’s longer life expectancy. This alone could eliminate nearly a third of the Social Security trust fund’s 75-year deficit. However, working to an older age could be especially challenging for low-income Americans and those in physically demanding jobs.
Odds are a solution would comprise some combination of these actions – higher taxes for some, lower benefits for some, more years on the job for some. And any proposal is likely to face opposition. The sooner policymakers act, the more options they will have, and the more time pre-retirement Americans will have to prepare for changes.
While headlines about funding can create uncertainty, they should not affect decisions about when to file. That strategy should be grounded in your goals, including income needs, health and life expectancy.
