Recent news has raised concerns about Social Security’s trust funds, which are now expected to be depleted by 2034—a year earlier than previously projected. This is primarily due to changing demographics, a shrinking workforce, and legislative changes.
While the Social Security Trustees Report still predicts a steady program for the next eight years, the program’s financial future depends on numerous uncertain factors like life expectancy and income projections. So, what can you do now to prepare for potential changes?
Why is Social Security Facing a Shortfall?
Social Security’s finances are dependent on three primary sources of income:
- Payroll taxes from workers.
- Benefit taxes from some seniors.
- Interest income from the trust funds.
If any of these income sources falter, the system faces a significant funding shortfall. Payroll taxes are the largest income stream, contributing around $1.3 trillion in 2024. Meanwhile, interest income and benefit taxes are far smaller, at about $69 billion and $55 billion, respectively.
However, the number of workers contributing to the system has decreased as baby boomers retire, leading to fewer workers paying into the system, while the number of beneficiaries grows.
Legislative changes, like President Biden’s Social Security Fairness Act, which increases benefits for some seniors, and President Trump’s One Big, Beautiful Bill Act (OBBBA), which reduces benefit taxes, have also had a financial impact.
Demographic assumptions—such as life expectancy, income levels, and fertility rates—also play a role in when the trust funds will run dry. If these assumptions turn out to be incorrect, the insolvency date could come even sooner.
What Happens if Social Security Runs Out of Money?
Despite these projections, it’s important to put the issue in perspective. If Social Security faces a funding shortfall before 2034, it’s unlikely that the government will allow benefits to drop by nearly 23%, as predicted.
More likely, lawmakers will step in with reforms to address the problem. There are generally three main ways the government could approach solving this issue:
- Increase Revenue – This could involve raising payroll taxes, increasing the income cap on wages subject to Social Security taxes, or finding alternative revenue streams.
- Reduce Expenses – Reducing benefits, increasing the full retirement age (FRA), or limiting the scope of benefits could help bring the program’s costs under control.
- Both – A combination of increasing revenue and reducing expenses could be the most balanced approach, but it could affect people in different ways, depending on the specifics of the changes.
Potential Reform Options
Increasing the Payroll Tax Ceiling: Currently set at $176,100 in 2025, raising or eliminating this ceiling would primarily affect higher earners.
Raising Payroll Taxes for Everyone: This would increase contributions across all income brackets but would have a broad impact on workers.
Cutting Benefits: Adjusting benefits, such as reducing the amount paid to all retirees or raising the retirement age, could help reduce expenses. However, the latter would mainly affect younger adults.
Though we don’t know exactly which path the government will take, the likelihood of intervention is high. Lawmakers will likely make a decision soon, and when they do, it’s important for both retirees and future retirees to review their retirement plans.
How You Can Prepare for Social Security Changes
If you’re concerned about Social Security cuts or changes, it’s crucial to plan ahead:
Adjust your retirement budget: Whether it means saving more, working longer, or relocating to a more affordable area in retirement, take the time to assess what adjustments you might need to make based on possible future changes.
Review your savings: Social Security might not be enough to sustain you in retirement if cuts happen. Boosting your IRA, 401(k), or other retirement savings could help ensure you have a solid financial cushion.
Plan for potential changes: Some of the proposed changes could affect your future retirement, so having a flexible plan will help you handle the uncertainty.
While Social Security reforms are uncertain, preparing now can ensure you’re in a better position to handle any changes that come. By adjusting your retirement plans and understanding the potential adjustments to Social Security, you can protect your future financial stability.
The $23,760 Social Security Bonus Most Retirees Overlook
If you’re worried about Social Security cuts, there are little-known strategies to help increase your benefits.
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