The financial forecast for Social Security worsened this year, according to the annual financial report released on Tuesday by the program’s trustees. If Congress does not develop a plan to shore up the program, it would need to cut benefits for millions of Americans in just a little more than six years.
Social Security’s deteriorating finances have long been thought of as a future problem — for another president, or another Congress, to resolve. But now, it is creeping ever closer because funds will run out before the end of the next president’s term.
The Social Security Old-Age and Survivors Insurance trust fund, which helps pay retiree and survivor benefits to more than 68 million beneficiaries, is now expected to run out of money at the end of 2032, one quarter earlier than projected last year. That means incoming revenue would be enough to pay only 78 percent of benefits, in other words, a reduction of 22 percent, according to the report.
But that situation would come to fruition only if lawmakers don’t act to strengthen the program before then, through some combination of higher taxes or reduced checks.
“This should be a wake-up call: Congress needs to act,” said Myechia Minter-Jordan, chief executive of AARP. “Americans have worked hard and paid into Social Security their entire lives, and they deserve to count on it when they retire. No family should see any cuts to what they’ve earned in Social Security.”
Medicare’s hospital trust fund is expected to run out of money in 2033, slightly earlier in the same year as the trustees had estimated last year. In the second quarter of that year, Medicare is projected to have only enough money to pay 89 percent of the program’s hospital bills. Future spending in other parts of the Medicare program, which is not financed using a dedicated fund, is expected to increase. That spending growth on doctors’ visits and prescription drugs will nevertheless increase the federal budget deficit and long-term federal debts.
Social Security has long faced a financing shortfall, but it has worsened in the short-term for several reasons. The trustees assumed that fertility and immigration rates would be lower, posing a drag on the program. And the trust fund will collect less tax revenue from Social Security beneficiaries, because of the big tax and policy bill passed last summer. The trustees also assumed that workers’ earnings would grow faster, helping the program’s finances.
Social Security must also confront its more longstanding challenges, driven in part by demographic changes. Dwindling birthrates mean fewer workers are paying taxes into the program, all while thousands of baby boomers are retiring daily and collecting their benefits for longer periods.
In addition, a larger share of the country’s wage base is not subject to payroll taxes — Social Security’s lifeblood — compared with years past. The taxes are applied up to only $184,500 in income, and rising income inequality means a greater share of Americans’ earnings exceeds that cap and is not taxed.
Medical costs have also been growing more rapidly than the rest of the economy in recent years, putting additional pressure on Medicare’s finances on top of the demographic trends that affect both programs.
A separate trust fund, which finances Social Security disability benefits for another 8.1 million people, is on more solid ground. It will be able to pay its bills for the next 75 years, the report said.
Many Americans believe Social Security is in shakier shape than it actually is: A recent AARP poll found that 39 percent of respondents believed that the program would not be able to make any payments when the trust fund ran dry.
There’s a broad misunderstanding about how the program works. It is generally financed by a combination of payroll taxes, ordinary income taxes on benefits and interest earned from the trust fund. If the amount of taxes collected exceeds the amount paid out, that surplus is held in the trust fund. And if benefits exceed the taxes collected, that gap is covered by the money in the fund.
“Simply put, the trust fund works like a personal checking account — money in, money out,” Jonathan Schwabish, a senior fellow at the Urban Institute, said this year in a report.
But since the early 2010s, benefits paid have exceeded the taxes received, which has led the trust fund balance to shrink, he added. Once the fund is empty, the program will be able to pay benefits using only the taxes it has received.
By law, Social Security (unlike parts of Medicare) cannot use money from the federal budget’s general revenues to pay benefits.
“These insolvency dates may feel abstract and far away, but the reality is that the senators elected in 2026 will be in office when Social Security reaches insolvency,” said Margaret Spellings, president and chief executive of the Bipartisan Policy Center.
