Roughly 67 million Americans, most of whom are 65 or older, received Social Security benefits in 2023. An estimated 183 million workers paid the Social Security payroll taxes that provided the bulk of the nearly US$1.4 trillion in benefits that year, which consumed 21% of the total federal budget.
But within a decade, Social Security could run short on funds to pay the full benefits Americans are counting on.
The retirement and disability program has been running a cash-flow deficit since 2010. The $2.7 trillion held in its two trust funds may seem immense, but those reserves are diminishing as the number of Americans getting benefits grows. Social Security’s trustees, a group that includes the secretaries of the departments of Treasury, Labor, and Health and Human Services, as well as the Social Security commissioner, projected in 2024 that both of its trust funds would be completely drained by 2035.
Under current law, when that trust fund is empty, Social Security can pay benefits only from dedicated tax revenues, which would, by that point, cover only about 79% of promised benefits. Another way to say this is that when that trust fund is depleted, the people who rely on Social Security for some or the bulk of their income would see a sudden 21% cut in their monthly checks in 2036.
As an economist who studies the Social Security system, I am alarmed that Democratic and Republican administrations alike have failed for more than three decades to take the actions necessary to keep its funding on track, either by raising taxes or cutting benefits. Instead, Congress has only made the program’s funding outlook worse. And now, the Trump administration is reducing the program’s staff, sending confusing signals about changes it intends to make, and undercutting the quality of service for the people who are eligible for these benefits.
But I do believe there are strategies that could help.
Taking steps backward
This gloomy outlook was clear to experts at least 32 years ago. In 1993, the Social Security trustees projected that the assets of the systems’ trust funds would be depleted in 2036.
Rather than resolve this now more imminent problem, Congress passed a law in December 2024 that could accelerate the crisis.
Called the Social Security Fairness Act, President Joe Biden signed it into law in early January. This measure ended the government’s prior practice of paying reduced Social Security benefits to retired teachers, firefighters and others who had pensions from their years of public service and who had not paid Social Security tax on much of their income. Now, these retirees will get full Social Security benefits. The Congressional Budget Office estimates that this change will cause the trust fund to be depleted six months earlier than previously expected.
President Donald Trump, for his part, wants the tax reform legislation Congress is working on to exempt all Social Security benefit payments from federal income taxes. Rep. Thomas Massie, a Kentucky Republican, has reintroduced a bill that would do that.
The University of Pennsylvania’s Penn Wharton Budget Model finds that should this new exemption take effect, it could make the trust fund run out of money two years earlier than the model currently predicts, hastening the day the Social Security program is forced to cut benefits.
In addition, Social Security already had record-sized backlogs of what it calls “pending actions,” according to a report from its own inspector general in August 2024.
And yet, despite this need to process paperwork faster, the agency is now less able to carry out its mission due to staffing cuts attributed to billionaire and Trump adviser Elon Musk’s so-called Department of Government Efficiency.
Principles for successful reform
Social Security is funded by a payroll tax of 12.4% on wages, which is split equally between workers and employers. Self-employed people pay the entire 12.4%. This payroll tax only applies to earnings up to $176,100 for 2025. The government increases this cap annually based on wage increases and inflation.
The program also receives about 5% of its revenue from interest generated by its trust funds and about 4% of its revenue from the tax that Trump wants to repeal.
The Committee for a Responsible Federal Budget, a nonpartisan nonprofit that focuses on fiscal policy, provides an online interactive tool to help people see for themselves what specific measures might do to shore up Social Security. Examples include increasing the retirement age by one month every two years and increasing the cap on income subject to the payroll tax that funds Social Security so it covers more of the highest-earners’ income.
The Brookings Institution, a centrist think tank, has presented its own bipartisan blueprint for making the system solvent. The Social Security Administration itself has pooled what it sees as good ideas from outside experts.
Three main principles characterize the approaches supported by the policy analysts and researchers who have considered which reforms to Social Security might strengthen its finances and long-term continuing viability:
- The program should be self-funded in the long run so that its annual revenues match its annual expenses.
- The reform burden should be shared across generations. Current retirees can share the burden through a reduction in the cost-of-living adjustment. Today’s workers can share the burden through an increase in the cap on income subjected to Social Security taxes. Gradually increasing the retirement age to keep pace with anticipated longevity gains would also be borne by current workers and young Americans who haven’t gotten their first job yet.
- The government should make sure that Social Security benefits will be adequate for lower-income retirees for years to come. That means reforms that slow the benefit growth of future retirees would be designed to affect only payments to higher-income retirees.
Ideally, in my view, any changes to Social Security should also help constrain the future growth of federal spending, given the current and projected growth in the budget deficit.
Past reform efforts
The last time the government made big changes to Social Security was in 1983, during the Reagan administration.
Back then, the government enacted reforms that slowly reduced benefits over time. These changes included raising the full retirement age, a change that is still being phased in. Because of those changes, workers born in 1960 or later cannot retire with full benefits until age 67 – two years later than the original retirement age.
The 1983 reforms also gradually increased the Social Security payroll tax rate from 10.4% to 12.4% by 1990, and for the first time levied federal income taxes on higher-income retirees’ benefits. Workers bore the burden of the payroll tax increases, and higher-income retirees bore the burden of the tax on benefits.
Those changes bolstered the program’s finances. One of those measures could potentially end if Trump manages to end the taxation of retirees’ Social Security benefits.
Today, about half of the Americans getting Social Security benefits pay some federal income taxes on that income, contributing revenue that helps finance the program as a whole. Taxpayers with annual income of at least $205,000 pay income tax that claws back about 20% of their benefits. That percentage is smaller for taxpayers with lower incomes. Individuals who get Social Security benefits and have incomes of less than $25,000 and couples making no more than $32,000 pay no income taxes on their Social Security benefits at all.
The most recent bipartisan effort to preserve the system’s solvency was in 2001. The Commission to Strengthen Social Security, during the George W. Bush administration, tried – and failed – to get Congress to enact reforms to shore up the program’s finances.
More than 20 years later, Americans and their elected representatives still seem unwilling to have a serious debate on these issues.
I believe waiting any longer is unwise.
Any solutions that might be introduced gradually today will no longer be viable in 2035 if the trust fund has been completely hollowed out. That would leave millions of older adults with lower incomes than they were counting on, plunging many of them into poverty.
Portions of this article were included in another piece published on June 1, 2023.
Dennis W. Jansen, Professor of Economics and Director of the Private Enterprise Research Center, Texas A&M University
This article is republished from The Conversation under a Creative Commons license. Read the original article.