Social Security will likely run out in 2035. By then, the taxes coming in will only be able to account for about 76 percent of benefit payments. However, Social Security can technically never ‘run out of money because it is funded through taxes.
When you pay taxes, the government is not holding onto your money for your retirement. They’re not investing it for later. Instead, they’re using it to pay current retirees. It’s a pay-as-you-go system, so when you retire the current workforce’s taxes will be funding your checks.
The problem is that it currently pays out more than it takes in. With a large population of Baby Boomers expected to retire soon, there will be even more retirees eligible for benefits and even fewer taxpayers to fund them.
Millions of Americans are dependent on Social Security income to help pay their bills. The rumor that Social Security is running out is disconcerting, to say the least. If social security ran out millions of retirees, disabled persons and their dependents would not be able to afford their bills.
Current Social Security payments are funded by the current workforce through FICA (Federal Insurance Contributions Act) and SECA (Self-Employed Contributions Act) taxes. It’s a pay-as-you-go program, meaning that you work and pay taxes now to fund current Social Security benefits, and when you retire the future workforce will fund your retirement then.
The reason that many people are worried about Social Security running out is that in recent years there has been more paid out in Social Security than collected. Put simply, there are more people in the retirement population than before and they are living longer than before, so it is more expensive to fund Social Security. Luckily, there is currently a surplus of Social Security income – by about 2 trillion. However, Social Security currently pays out about $90 billion a month to over 64 million people. That’s over one trillion dollars every year.
When will Social Security run out? If there is no change to how Social Security is currently collected and distributed, then the surplus is expected to run out in 2035. But Social Security will not run out of money in 2035 because the program is funded through taxes. So, as long as FICA and SECA taxes are collected, Social Security will not go completely bankrupt. It will just have less income than it pays out. Congress may take steps to increase the funding or decrease payouts. We’ll discuss the full potential of the future of Social Security in this article.
Why Will Social Security Run Out of Money
There are several reasons that Social Security is paying out more than it is collecting. Some include the large group of Baby Boomers headed into retirement, the increase of self-employed vs traditional workers, and a high proportion of the population depending on Social Security.
Americans have fewer children
Over the past few decades, the average number of children per household has essentially halved. In the age of Baby Boomers, it was common for a family to have 3 or 4 children (the average was 3.54). In 2020, most families had 1 or 2 children (with an average of 1.93). Fewer children growing up means a smaller workforce, which means fewer people paying into the pool of FICA and SECA taxes.
More People are Self-Employed
The Social Security system was designed in the 1930s under the assumption that most people worked for a corporation. The way it’s set up, employees and employers each pay half of the FICA tax, up to 12.4% of wages. However, self-employed workers don’t have an employer to cover the second half. They can still be taxed the full 12.4% but are allowed to deduct 6.2% as a business expense.
There is a High Proportion of the Population on Social Security
Social Security pays over 64 million people or about one in every six U.S. residents. The high proportion of the population dependent on the benefits is a key reason it’s running out. Part of the reason for this is that Social Security payments are not just for retirees. The government also sends Social Security checks to disabled persons, survivors of workers who have died, and their spouses and/or dependents.
Changes to Social Security in 2021
In 2021, Social Security benefits will rise by 1.3% to adjust for COLA (Cost of Living Adjustment). However, don’t get too excited, that only comes out to about $20 extra each month.
Additionally, the retirement age for receiving full benefits increased by two months in 2021. The current retirement age is now 66 and eight months.
Maximum Social Security benefit in 2021
The maximum Social Security benefit in 2021 depends on your circumstances. Here are the max benefits you can receive in 2021:
| Amount | Age Filed |
| $3,895 | 70 |
| $3,113 | Full retirement age (Currently 66 and eight months) |
| $2,324 | 62 |
How Will Social Security Change in the Future
In the future, social security will likely reduce benefits by about 13 percent, while increasing the tax rate from 12.4 percent to 14.4 percent according to the Social Security Office of Retirement and Disability. A combination of changes could extend the funding of social security benefits for the next 75 years.
It’s also likely that the age to be eligible for Social Security will be raised in the future. In 1983, when Social Security last almost ran out, the government raised the retirement age to 65. The government is likely to do this again.
Projected Timeline: What Will Happen to Social Security
10 Years
In ten years (2031), Social Security will likely be almost the same as it is now. The surplus of Social Security income will not run out until 2035, so in ten years there may be some changes to Social Security, but Social Security will almost certainly not run out in the next decade.
20 Years
In 2041, there will likely be significant changes to Social Security. While we don’t know exactly what measures the government will implement to prevent Social Security from going bankrupt, we include a few likely options in the next section.
30 Years
In the next three decades, Social Security will likely still be on the measures implemented to prevent the program from running out of money. (See the section “How can the government prevent social security from running out” below for likely outcomes).
40 Years
Social Security will likely still be around, even after 40 more years. It’s difficult to predict what will happen in that timeframe as it depends heavily on factors such as population, life expectancy, and average income. However, Social Security may be in another surplus in the next 40 years, ready for many more generations of retirees.
How Can the Government Prevent Social Security from Running Out
There are several ways that the government can help prevent social security from running out, and some of them have worse consequences than others. It’s likely; however, that the government will implement a few of the following measures.
Raise the retirement age
The current retirement age to receive full Social Security benefits is not 65 like most people think: it’s 66. 2002 was the last year retirees could claim full benefits at age 65. The government started raising the retirement age in 2002. It’s expected that the retirement age will rise to 67, starting in two-month increments.
Pro – Raising the retirement age would reflect the increase in life expectancy. The life expectancy in 2020 for US citizens is 78.61 years old (when adjusted for COVID-19 variants). In 2000, the life expectancy was 76.64. So, increasing the retirement age by two years over the last two decades would match the two years of increased life expectancy over that same time.
Con – Unfortunately, this also means that retirees would have to work for two more years before they could retire. Or, if they decide to retire at 65 anyways, but they would not be able to withdraw full Social Security benefits for two years. In that case, retirees would have to have enough savings to sustain themselves until they are eligible to withdraw from Social Security.
Stop adjusting for inflation
Inflation is the annual increase in the price of goods, or in other words, it means that each year you can buy less with a dollar. For instance, in 2000 a movie ticket cost about $5. 20 years later, the average price of a movie ticket has doubled to about $10.
Currently, Social Security benefits are adjusted every year for inflation with a COLA (cost of living adjustment). However, there is no guarantee that the government will continue to do this.
Pro – If they did stop adjusting for inflation, it could save the government millions on the program each year.
Con – However, it would also decrease the spending power of every person withdrawing Social Security.
Raise more taxes
There are two ways the government could raise more taxes for Social Security. First, they could raise the tax rate, and second, they could raise the amount of income they tax.
Currently, taxpayers contribute 6.2% in Social Security tax and 1.45% for Medicare on their first $142,800 in income. If they make more than that, it is not taxed. The government could increase that income threshold, or they could also increase the percentage rate of tax (or both).
Pro – There are plenty of Americans earning over $142,800 who could contribute more to Social Security if more of their income was taxed.
Con – The rich have a knack for avoiding taxes (just take President Trump for example). They may find ways to avoid the increased tax as well. And raising the tax percentage would likely disproportionately affect the poor and middle class.
Can you retire without taking Social Security?
You do not have to take Social Security when you retire. In fact, if you earn over a certain threshold the government may restrict or withhold Social Security benefits entirely.
Currently, the threshold for those drawing Social Security under 66 is $18,960. If you earn more than that, for every $2 you earn, the government will reduce your Social Security benefits by $1. For those at their full retirement, however, there is no penalty for working and you will still get full benefits.
You can also delay taking Social Security benefits when you retire until you decide to use them. According to an interview with CNBC, you don’t want to delay benefits past age 70 because after that your benefit will not grow.
How to Prepare for When Social Security Runs Out
To prepare for when Social Security runs low, you should plan to have backup funds for retirement. Do not plan on Social Security as 100% of your retirement funding. While we cannot advise you (only a Certified Financial Planner or CFP legally can offer you specific advice) you should diversify your retirement investments. Consider using a 401K, an IRA and/or other means of investing like a brokerage account or even real estate.
The best option for your situation will vary, but if you have questions you should speak with a CFP to discuss ways you can financially prepare for retirement. Most CFPs will charge fees for new clients; however, if you decide to use an online investing service such as Vanguard, Fidelity, Charles Schwab, etc., then you may be able to get free consultations through their customer service.
Key Takeaways
We covered a lot in this article! Let’s recap what we learned.
- Social Security is a pay-as-you-go system that current workers pay into and current retirees withdraw from.
- However, it currently pays out more money in benefits than it receives in contributions. But it’s still running because of surplus money that was collected up until 2019.
- In 2035, the Social Security surplus will run out. This doesn’t mean that Social Security will go bankrupt, just that the program will need to change to bring in more money and/or payout less.
- Social Security was not reduced in 2021, in fact, it was increased by 1.3%.
- In the near future, Social Security is not going away. However, the program will likely go through several changes.
- The Social Security crisis can be solved by the government stepping up with a few measures that will essentially increase taxes and lower payments.
- Regardless of when you retire, you should plan on having backup retirement funds, just in case. Speak with a CFP to set up an individual retirement plan.
