We work with individuals and families from all walks of life: Different ages, different backgrounds, different careers. One common topic that frequently comes up in conversations, regardless of life stage, is Social Security. People want to know if they can count on it being there. For some, their retirement greatly depends on it; Social Security income is a critical part of their income plan. For others, they simply want to get something back from a program that they have been paying into their entire careers.
The 2025 annual report on the state of the Social Security program was published on June 18, 2025. The part of the report that grabs all the headlines is that the trust fund will be depleted some time in 2033. This gets twisted into clickbait headlines like “Social Security will be gone by 2034”. Many see these types of articles and ask themselves, “Will I get anything from Social Security?”. Before tackling that big question, let’s start with a little background on the program and how it is funded.
How Social Security is funded
Social Security is funded by a payroll tax, which both the employee and employer contribute (each paying 6.2%). Self-employed individuals pay the full 12.4%, as they are both the “employee” and the “employer”. The first $176,100 of your wages (2025) is subject to social security payroll tax. If someone makes $350,000 in a year, for example, they are only paying the 6.2% payroll tax on the first $176,100. Even if someone makes $1 million in a year they are still only paying Social Security tax on the first $176,100. This cap is commonly referred to as the wage base.
The Social Security Act requires that the Board of Trustees of the program report annually to Congress on the financial status of the Old-Age, Survivors, and Disability Insurance (OASDI) Trust funds. You may (or may not) recognize the acronym OASDI from a paystub. Technically, the “OASI” has its own Trust fund and the “DI” has its own Trust fund. The OASI part is what most people think of when they think of Social Security retirement income. For the remainder of this blog I’ll frequently use “retirement fund” or “disability fund” as it is more relatable than “OASI Trust fund” or “DI Trust fund”. It is important to note that the reason that these two trust funds exist in the first place is because for many years there was actually a surplus (tax revenue was greater than liabilities paid out), and therefore the capacity to build up each of the respective trust funds.
The history and growth of the Social Security program
The Social Security program was signed into law by Franklin Delano Roosevelt in 1935, intended to help those in retirement not fall into poverty. For the first few decades after FDR signed Social Security into law, the program was in expansion mode. In 1939 the program was expanded to include workers’ dependents and survivors. In 1947, an Advisory Council on Social Security was established to address two main issues with respect to the retirement & old-age benefit: 1) the eroded purchasing power of benefits and 2) the increased need of public assistance by older persons. The recommendations of the Council was a benefit increase (for all benefits), as well as a doubling of the minimum benefit. They also expanded eligibility for a greater number of dependents, survivors, workers, and the disabled. During the 1940s the number of beneficiaries grew from about 222,000 to over 3 million in 1949. Taking the advice of the Council, the Social Security program was amended in 1950, resulting in an across-the-board increase of about 77 percent of benefits. One might wonder, how did they finance all of this program expansion? Included in the 1950 amendments was increasing the wage base, gradually increasing payroll taxes for both employer and employee, as well as taxing the self-employed (who were previously ineligible for program benefits). By the mid-1950s it is estimated that 90% of workers were covered by the Social Security program.
The Cost of Living Adjustment (COLA), enacted in 1972, provided for automatic benefit increases based on CPI. While good for those receiving benefits, the actuarial assumptions used to determine the payroll tax rates did not account for the benefit increase realized by COLAs. In other words, the tax rates at the time would not be able to keep up with the required long-term funding of the program! To counteract this, Congress adjusted the benefit formula in 1977, as well increasing the tax rate. However, during this stagflationary period, benefits paid out increased more rapidly than anticipated (remember that COLA is linked to CPI) while slowing wage growth and high unemployment led to reduced payroll taxes. Generally speaking, increased costs and less revenue isn’t a winning formula. Due to this imbalance, the retirement trust fund was projected to run out of money between 1981 – 1982, according to the 1980 report. Ultimately the program remained solvent and didn’t miss or delay any payments, even though an overhaul was needed in the very near future. By 1983 Congress took significant action to ensure that the program would continue to pay its benefits on time for decades to come. The solution included increasing payroll taxes, gradually raising the full retirement age from age 65 to 67, and making up to 50% of Social Security income taxable for those that exceeded a certain amount of income ($25,000 for an individual and $32,000 for a married couple filing jointly).
Since the 1983 overhaul, more subtle program changes have been made in the effort to continue the program’s solvency. In 1993, under President Clinton, the Omnibus Budget Reconciliation Act included a provision that increased the Social Security benefits subject to income tax from 50% to 85%. In 2000, the Retirement Earnings Test was eliminated for those at full retirement age or later, which helped working seniors not be penalized for working while also claiming Social Security benefits. This encouraged baby boomers to continue working and paying payroll taxes, which ultimately helps fund the trust fund.
Current state of Social Security
The 2025 report projected that the current OASI Trust Fund (the retirement fund) will be depleted some time in 2033, unchanged from the 2024 report. The 2025 report states that the DI Trust Fund (the disability fund) does not become depleted in the actuaries’ 75-year projection. This is the same as the 2024 report. It is great that the disability program is well funded! However, more people depend on retirement income compared to disability income, hence the widespread concern. If nothing changes, the report goes on to state that current & future benefits would have to be reduced by 22.4%, permanently. This increased from 20.8% year over year. For those that are currently receiving Social Security benefits, this may sound terrifying! Many people may not be able to get by if they wake up one day and all of a sudden their Social Security check is approximately 80% of what it previously was. One myth is that if the retirement trust fund runs out of money, retirement payments stop immediately. As discussed above, that is not the case. There are still revenues from payroll taxes that help pay out the liabilities of the Social Security program, but at the current pace not enough to make 100% of the payment.
Potential Solutions
So what are some potential solutions to keep the program solvent? As discussed above, Congress has acted on several occasions throughout the decades by doing the following:
- Changing the benefit formula
- Increasing the wage base
- Increasing payroll taxes
- Increasing the full retirement age
- Increasing the amount of Social Security benefits subject to taxation
There is a historical track record of how these actions have helped extend the life of the retirement trust fund and have helped keep the program solvent. Congress will likely take a look at their toolbox of the aforementioned actions and end up using a combination of the tools available to them.
Other potential solutions that have been discussed are the following:
- Means testing for the wealthy (or an offsetting tax similar to Medicare IRMAA premiums)
- Getting rid of the wage base cap, similar to Medicare
- Reducing how COLA is factored into the retirement benefit
- Changing the retirement benefit formula to use CPI for inflation instead of wage inflation
How should your financial plan account for all of this?
Based on history (especially looking at the major 1983 Social Security reforms) I believe that Congress will be able to make the necessary changes needed to ensure that the millions of Americans that depend on Social Security will still be able to access their promised benefits. I think it is highly unlikely that most people that are already receiving benefits or within 5 – 10 years of receiving their retirement benefit would get a significantly reduced benefit. That would be a very tough sell, politically. For those that are 10+ years away from retirement age, my advice would be to expect that the program will change from its current state, but it is very likely that you will still receive a retirement benefit. All that said, Congress will need to take action sooner rather than later based on the 2025 report.
For the pessimist, it is very reasonable to stress test your financial plan to see what it looks like if you only receive 75 – 80% of your promised benefit. You may even want to stress test your plan if Social Security goes away (note: I do not think the program is going away)! What does the long-term outlook of your income and net worth look like with a reduced benefit? Did much change or does it look like there is a very real chance of you running out of money? These are important questions to ask. Furthermore, what can be changed (among things that are in your control) to provide a better outcome? We have these conversations with clients every week, and are happy to have the conversation with you. Feel free to reach out to any of our advisors about how Social Security intersects with your financial plan.
