Social Security is Running out of Runway

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Social Security is Running out of Runway

The Social Security Act of 1935 was the cornerstone of President Franklin Delano Roosevelt’s New Deal. It was intended to provide retirement income to those over the age of 65. Over the years it has been expanded to help the disabled and widowed as well. However, recent update estimates indicate that if no changes are made to the program, the current reserve funds will be depleted just short of its 100th birthday.

Brian Wesbury provides an excellent analysis on the most recent numbers released by the Social Security Trustees annual report on his blog. Over roughly a 65 year period, more social security taxes were collected than benefits were paid out. As a result, two trust funds accumulated over time. The first was the Old Age and Survivors insurance fund which was started in 1937 and the Disability Insurance Fund which began in 1957. The total surplus of these two funds peaked in 2020 at $2.9 trillion. In other words, for 65 years there has been more money coming in than going out for social security related benefits. There have been enough people working to pay for the people not working. But that trend reversed in 2020 and the latest projection is that the surplus will be depleted by the year 2034. That’s just 8 years away. No, don’t panic right away. I don’t think that Social Security will be a thing of the past, but I do think some changes will be forthcoming.

If these reserves are depleted, there are only enough people working to fund social security benefits for retirees at about 81% of their initially promised benefits. Why is this the case? Because we have more people collecting benefits than we have paying into the system. The gradual decline of the birthrate in this country has made us top heavy in age. More retirees than workers, in other words. This problem in Japan lead them to what is referred to as a lost decade of economic growth. And this is what China is now concerned about, since their one child policy for years and years will eventually lead to a very gray headed Chinese population. In the U.S., Immigration has muted this birthrate trend. But with major changes to immigration in the works, the number of immigrants paying social security may be affected in the future. Another challenge for the program is that people are living longer than ever. Changes have to be made.

So, what are the options? The Social Security Trustees gave us two:

• Reduce scheduled benefits by 22%. Retirees aren’t going to like that one. That means if you are used to receiving $2000 a month in social security that amount would be reduced to $1560.
• Increase the Social Security Payroll tax rate by 29%. This would take the rate from 12.4% to almost 16% – a 3.65% increase. Now if you work for an employer, you pay half of the 12.4% and your employer pays the other half. So your half would go up a little less than 2%. Those who are self-employed would feel the full increase. Obviously, current workers and employers aren’t going to like this option. Now, the Trustees say either of these options would keep the reserve fund around for another 75 years.

Let’s look at some additional options:

• You could Eliminate the taxable earnings cap. Right now, this cap is at $176,100. So if you make more than that amount of money, you are not paying social security taxes on anything over that amount. Estimates by the Congressional Budget Office state that raising the limit to $250,000 would raise an additional $1 trillion over a 10-year period.
• A fourth option is broadening the types of income that are taxed for social security purposes. Right now, it is just wages and self-employment income. But taxing investment income or retirement distributions would broaden the tax base.
• A fifth option is gradually raising the full retirement age. This has already happened in the past. Full retirement age for many currently is 67.5.
• A sixth option is reducing the benefit formula for high income earners. In other words, if someone is still making money in their retirement years from other sources, their social security benefit could be reduced.
• A seventh and final option that I’ll mention would be reducing or eliminating cost-of-living adjustments. This is meant to account for inflation and allows people’s monthly benefit amounts to increase over time.

Of all of these options I think that we will see a combination of solutions. The most likely to be implemented, in my opinion, is raising the cap on income subject to the social security tax. This would affect a much narrower portion of the voting constituency and seems to make the most sense to me. I also think it only makes sense to also raise the retirement age for full time benefits. This is just as much owing to increased life expectancies anything. If this particular solution were implemented soon enough, there could be a phasing in of this age increase over time. However, it is normally the case that major changes don’t happen until last minute – so we may still be talking about these options five years from now.

A few proposals are under consideration in Congress, including the “You Earned It You Keep It Act” and the “Social Security Enhancement and Protection Act of 2025. ” The latter proposes increasing the social security tax rate but also increasing benefits for lower income recipients. It’s good that proposals are floating around, but I would bet that it takes that long before Congress is ready to tackle it. It’s a problem that is going to require hard decisions and sacrifice for all or part of legislator’s constituency,  but tackle it they must.

So how does this affect you? Very simply, don’t depend on Social Security to be your only source of retirement income. I believe that there will be some measure of social security available for your retirement years. It affects too many people for politicians to allow it to disappear. But it could be received in lesser amounts or later than you might expect – so do all you can to save a portion of your earnings now. Take advantage of your employer’s match in its 401k plan, which could make your money double overnight. Also consider starting a ROTH IRA, which allows your contributions to grow on a tax-free basis. And make these contributions through payroll deduction or automatic withdrawal. This is the only way you will consistently put aside money that can grow to help you in your senior years when you may not be able or willing to earn as much working.

Did you know that we help with retirement conversations? If you are looking to save for the future or to maximize your resources during retirement, we can help. Start a financial conversation with us today by exploring our website or calling your local branch. We hope you’ll subscribe to this podcast it in your favorite podcast app and share it on social media. And until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of Foundation Bank/McKenzie Banking Company on July 2, 2025. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. Foundation Bank/MBC is an Equal Housing Lender, Member FDIC.