Social Security funding shortfall: What happens if the trust fund runs out?

Social Security is approaching a major funding deadline, but the idea that the program will simply “run out of money” and stop sending checks is misleading.

The latest Social Security Trustees Report projects that the Old-Age and Survivors Insurance Trust Fund, which pays retirement and survivor benefits, will exhaust its reserves in the fourth quarter of 2032.

That wouldn’t mean Social Security disappears. Payroll taxes would continue coming in from workers and employers, allowing the program to keep paying benefits.

The problem is that those revenues wouldn’t be enough to cover everything currently promised.

How much could Social Security benefits be cut?

If lawmakers made no changes before the trust fund was depleted, incoming revenue would be enough to cover around 78% of scheduled retirement and survivor benefits.

In practical terms, that implies an across-the-board reduction of roughly 22% under current law.

Someone scheduled to receive $2,000 per month, for example, could theoretically see that fall to around $1,560 if the full shortfall were passed directly to beneficiaries.

The Disability Insurance Trust Fund is in considerably better condition and is projected to remain solvent throughout the Trustees’ 75-year forecast period.

If the retirement and disability funds were considered together, their combined reserves are projected to be depleted later, in 2034, when approximately 83% of scheduled benefits could still be paid.

Could Congress prevent the cuts?

Yes, Congress could prevent the cuts, but lawmakers would need to change either Social Security’s revenue, benefits or both.

Options debated over the years include raising or eliminating the taxable earnings cap, increasing payroll taxes, changing the retirement age or adjusting how future benefits are calculated.

None of those solutions has been enacted yet.

That means people planning for retirement shouldn’t assume Social Security will vanish in 2032. The more accurate concern is that benefits could become significantly smaller if lawmakers allow the trust fund reserves to reach zero without a funding agreement.

Social Security would still collect billions through payroll taxes. What it could no longer do is automatically pay 100% of the benefits currently promised.