Financial professionals who work in Social Security planning frequently address concerns about the system’s future. It’s well known that the Social Security Trust Fund is expected to run out of funds by 2035. Mallory Kretman shares, “Clients often come to me with questions about whether their current benefits will continue after 2035, and many of my pre-retiree clients wonder if they will see benefits at all.” While the projected depletion of the fund doesn’t mean benefits are going to disappear altogether, they could face significant adjustments.
In this post, you’ll find out more about the true health of the system, so you can plan for your future with clarity and confidence.
Social Security Benefits Are Largely Funded by Payroll Taxes
Most of the funding of Social Security benefits is provided by the taxes associated with the Federal Insurance Contributions Act (FICA). Even if the trust fund is entirely emptied by 2035, Social Security should be able to pay 83% of the scheduled benefits. This percentage is expected to drop further, to about 73% of scheduled benefit as the 22nd century approaches.
Policymakers are understandably driven to keep Social Security benefits afloat. Retirees and soon-to-be retirees make up a big part of their constituency. Possible measures include a payroll tax hike, partial benefit reductions, higher caps on taxable wages, changing the full retirement age, or some combination of these answers.
Factors and Elements That Affect Social Security’s Health
The biggest challenge in the ongoing health of the Social Security system is America’s aging population. There are fewer workers per beneficiary now, and payroll taxes are unable to keep up with benefits, which results in a deficit.
This deficit has not yet impacted benefits for current or future recipients, however. In fact, the 2022 annual report to Congress by the Trustees of the Social Security Administration stated the deficit has actually improved slightly, due to better-than-expected recovery in employment, GDP growth, and earnings from the pandemic and the 2020 recession. In addition, long-term actuarial adjustments, as well as continued economic and earnings growth, could help ease the deficit problem.
Nonetheless, even these results may be offset by reports of decreasing fertility rates and expected lower immigration into the U.S. (especially with stricter measures anticipated with the second Trump Administration). Both of these factors may result in less workers contributing to the Social Security system in the future and thereby putting further strain on keeping the system solvent.
Ideas That Could Help Social Security Endure
Again, policymakers have considerable incentive to repair Social Security for their aging constituents. They have a few potential avenues they could take.
Many lawmakers prefer a single-policy measure that can improve the Social Security funding gap. One such option is raising payroll taxes by 3.33 percentage points. This would raise taxes on workers, particularly those with upper-end salaries. Mallory explains, “By increasing the amount being added to the system, the system is better able to meet the demands of current benefits being paid out without depleting the reserves.”
In September 2024, the Committee for a Responsible Federal Budget released a statement on Social Security citing a 21% reduction in benefits by law in 2033 if changes are not enacted. Some legislators, such as the House Republican Study Committee (RSC), have proposed increases to the full-benefits retirement age (67 to 69) as well as cutting benefits by 13% for subsequent retirees after 2033. Criticism of these proposals include that some pre-retirees currently in their late 50s may have insufficient time to adjust their retirement plans and proposed reductions would be financially devastating to middle- and low-income retirees.
Other options legislators are considering include subjecting all wages to payroll tax, raising the full retirement age, slowing benefits for high earners, and making changes to cost-of-living adjustments (COLA).
Social Security Planning: Can the System Survive?
Although Social Security has endured decades of changes and faces a challenging future, the system is still fixable. Much of the responsibility falls on lawmakers’ ability to make bipartisan reforms and tax changes that balance the needs of beneficiaries and workers. “As you plan for your future,” Mallory advises, “remember that with thoughtful strategies, personal savings, and professional guidance, you can build a stable retirement regardless of the challenges ahead.”
Get Help With Social Security Planning
Laurel Wealth Planning can help you with Social Security planning and other finance matters. LWP advisors can put together effective programs based on what you want and need. To set up a free consultation, call Laurel Wealth Planning at (952) 854-6250 or contact them online.
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Mallory is a Wealth Manager and Shareholder. She listens deeply and helps simplify complex financial situations to help clients move into an easier, clearer future. She aims to give financial advice that is compassionate, wise, and easy to understand.
