Will Social Security run out? Here's what could happen to your benefits

The financial future of the more than 70 million Americans who receive Social Security benefits is slightly more secure than anticipated: The trust fund reserves used to pay beneficiaries are projected to become insolvent in 2035, a year later than previously projected, according to the agency’s annual trustees report, released May 6, 2024.

Social Security will still exist after 2035, according to the report. But without congressional action, retirees will only receive 83% of their full benefits.

Preventing that shortfall would likely involve trimming benefits or increasing the Social Security payroll tax.

Social Security is funded through a payroll deduction: Employees and employers each pay 6.2% of the tax, adding up to 12.4% in total. (Self-employed individuals pay the entire 12.4% themselves.)

In tax year 2024, the tax is applied to the first $168,600 of your income. That cap is increasing to the first $176,100 of your income in tax year 2025.

When you contribute to Social Security, the money doesn’t go directly into your account: Workers pay into a fund that pays for current retirees’ benefits.

For every dollar you pay, 85 cents goes towards the Social Security trust fund, according to the Social Security Administration. The remaining 15 cents goes into a separate fund that pays benefits to people with disabilities and their families.

According to the May 2024 trustees’ report, the Social Security Administration will deplete its reserves in 2035. Without congressional action, the fund will then only be able to pay out 83% of full benefits.

In addition to meeting its current obligations, the Social Security fund must also account for the annual Cost of Living Adjustment (COLA), which modifies the payments recipients receive to account for inflation.

The adjustment is based on the change in the Labor Department’s Consumer Price Index from the third quarter of the prior year to the third quarter of the current year.

The COLA for 2025 is 2.5%, which works out to an average increase of $49 per check. Most recipients will see their first bigger check in January 2025.

Changes to Social Security benefits and revenue sources need to come from Congress. There are different strategies, but most involve one or more of the following:

• Cutting Social Security benefits
• Increasing the payroll tax (or the income limit)
• Increasing the age at which taxpayers can claim benefits

The last time Social Security faced a reserve deficit was in 1983. Bipartisan legislation increased the full retirement age from 65 to 67 and instituted an income tax on Social Security benefits.

When it comes to retirement saving, start as early as possible. Experts recommend setting aside between 10% and 15% of your paycheck, but you can start small and increase over time. If you have outstanding credit card bills or student loans, clearing those debts may take precedence.

401(k) plan

A 401(k is a retirement investment account sponsored by an employer. Contributions are tax-deferred, so they can lower your taxable income the year they’re made and give you more to invest. If your company matches 401(k)s, maxing out your contributions should be the priority. Many employers will match between 2% and 6% of an employee’s annual salary. 

IRA

An individual Retirement account (IRA) is another investment option, but it’s not connected to your employer and typically has more options.

Like a 401(k), a traditional IRA is tax-deferred and contributions can be tax-deductible, funds in the account grow tax-free, but withdrawals are subject to income tax when you take distributions. We tapped Charles Schwab and Betterment as two of the best IRAs.

A Roth IRA is an after-tax account, so you don’t have to pay taxes on your gains later. Ally Invest and Wealthfront rank among the best options for Roth IRAs.

There are also robo-advisor services that can build a portfolio for you based on your risk tolerance and time horizon and rebalance as you get closer to retirement. Top robo-advisors include E-Trade and SoFi.

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