Social Security's Shrinking Reserves Could Mean Lower Benefit Payments: What To Know

CNET

3 days ago

Social Security reserves are drying up faster than expected. Here's what you should know.
Getty Image/ Zooey Liao/ CNET
Millions of Americans rely on Social Security as supplementary income, and for many, it's their lifeline. According to the latest annual report from the Social Security Trustees, the program is in worse shape than expected just months ago, with trust fund reserves now projected to run out a year earlier -- in 2034.
To be clear, monthly Social Security payments will still go out, but recipients could see nearly a 25% cut in benefits. That's troubling, especially for those who rely on it as their main income source. Turning things around would require swift action from lawmakers.
The overarching issue for the Social Security program is that it's paying out more money than it's receiving from the current workforce, a situation known as an actuarial deficit. The annual report details some of the reasons that the trustees project the trust funds to run out sooner than expected, including lower birthrates and newly implemented initiatives like the Social Security Fairness Act.
The annual report is an important health check on the current state of the Social Security program, but it also lays the groundwork for policymakers to make funding changes -- reducing the potential harm to those who rely on monthly payments, many of whom are already struggling financially.
Below, we'll go over some of the details found in the report, including the reasoning for the updated projections and what it means for you if Social Security can't continue to pay full benefits to recipients -- or when the trust funds become "insolvent."
For more, here's what you should know about paper Social Security checks going away.
How is Social Security funded anyway?
Social Security is funded through a dedicated payroll tax, meaning that employers and employees each pay 6.2% of wages up to the taxable maximum for the given year. For 2025, the maximum is $176,100. If you're self-employed, your tax rate is doubled to 12.4%.
The dedicated tax dollars go to the Social Security trust funds -- comprising the Old-Age and Survivors Insurance and the Federal Disability trust funds -- which are managed by the US Treasury and used to pay retirement, disability and survivor benefits. Any surplus is invested in special government securities.
The main issue is with the OASI trust fund, which is expected to be depleted in 2033 -- at which point it will only be able to pay about 77% of scheduled benefits. The DI trust fund reserves aren't expected to be depleted within the 75-year period that ends in 2099.
What's causing the Social Security fund to run out of money?
Social Security is running out of funds for a number of reasons. However, a major factor is the growing number of Baby Boomers retiring compared to the size of the current workforce, which can't pay in enough to keep the Social Security fund solvent.
In addition to the growing number of retirement applications, the Social Security Fairness Act, which went into effect in January of this year, has further strained the program. The act repeals two provisions that previously prevented certain types of public workers from receiving benefits. With those provisions out of the way, Social Security is responsible for ongoing payments and billions of dollars in back payments for qualifying individuals.
Another factor is the growing actuarial deficit, which has widened since the 2024 annual report that had projected insolvency in 2035. The actuarial deficit is the difference between the Social Security's payment obligations versus the flow of money into the Social Security trust fund. Last year, the deficit was 3.50%, where it has since grown to 3.82%. These deficit projections are based on government estimates extending through the end of the century.
The latest annual report also took into account lower birthrates for a longer period of time compared to last year's report and how much labor contributes to the GDP.
What would it take to make Social Security solvent?
Closing the gap and making the Social Security program solvent would require a cut to benefits, a permanent increase to the payroll tax or a combination of the two.
The annual trustees report lays out potential paths to make Social Security solvent until 2099. One path would be to introduce an immediate, permanent payroll tax hike of 3.65% to be shared between employers and employees. Another path would be to immediately and permanently cut all scheduled and future Social Security benefits by 22.4%.
What happens after the Social Security fund becomes insolvent?
Image illustrating how much in benefits Social Security will be able to pay after the fund becomes insolvent.
Social Security Administration
If nothing is put in place to fill the gap for Social Security funds, 2034 will be a tough year for many. It's important to remember that Social Security payments won't suddenly stop -- but they will be reduced.
After the Social Security trust funds are depleted, existing payroll deductions will still be able to pay up to 81% of benefits.
For more, be sure to check out the Social Security and SSDI cheat sheet.