Social Security was created in 1935 as a safety net for older Americans. Today, it is the largest federal program, providing benefits to over 70 million retirees, survivors, and people with disabilities.
But as we often talk about, Social Security is facing an uncertain financial future and may need to cut retirement benefits as soon as 2032.
Funding shortfalls were always expected, but this is happening far sooner than projected. In fact, reforms in the 1980s were supposed to shore up the program through at least 2058.
If you’re wondering what happened, keep reading.
How Social Security works
To understand Social Security’s shortfall, it’s important to start with a few basics about the program (you can get a full breakdown of how Social Security works and its challenges by reading our Social Security policy primer).
Social Security is a pay-as-you-go (PAYGO) system, meaning current workers pay taxes on every paycheck, which are then used to provide checks to current beneficiaries. This payroll tax revenue goes into a trust fund, and any money that is not immediately needed for benefits builds up the trust fund’s reserves.
And when revenue falls short — which has happened every year since 2010 — these trust fund reserves help cover the difference.
Now, you may be wondering what the problem is. Well, Social Security’s trust fund is projected to run out of its surplus money in 2032. After that, incoming revenue would cover only part of scheduled benefits.
An aging population helps explain this squeeze. As baby boomers retire, more people collect benefits. Longer lifespans mean people generally collect them for longer periods of time, while lower birth rates mean fewer workers are entering the workforce to support beneficiaries. Over the last 80 years, Social Security has gone from 42 workers per beneficiary to just three.
Yet these pressures are hardly a surprise. Congress anticipated them when it overhauled Social Security more than four decades ago.
1983 reforms and expectations for the future
In 1983, Social Security faced an immediate financing crisis. A bipartisan group known as the Greenspan Commission helped lay the groundwork for a solution to this crisis, and Congress passed reforms based on its recommendations.
The package that was passed into law combined tax increases, benefit changes, and expanded coverage. Among other changes, it accelerated payroll tax increases, made a portion of benefits taxable for higher-income recipients, raised the full retirement age gradually, and brought newly hired federal employees into the program. All in all, the package intended to restore financial balance over a 75-year period — roughly through 2058 — and it accounted for baby boomers retiring, longer lifespans, and lower birth rates.
That leads us to the trillion-dollar question — why is Social Security’s trust fund running out 26 years before expected?
Why have the reforms fallen short?
One major reason is that earnings have not grown evenly across income levels since the Greenspan Commission.
As we’ve discussed, Social Security taxes only apply to earnings up to an annual cap called the taxable maximum ($192,300 in 2027). Although that cap rises with average wages, earnings among the highest-paid workers have grown faster than those of workers who make less than the cap, leaving a larger share above the taxable limit. That means there is less revenue than if earnings growth had been more even.
The form of workers’ compensation matters, too. Employer-sponsored health insurance is not subject to Social Security payroll taxes. As health insurance takes up more of the compensation workers receive from their employers, less compensation is subject to the payroll tax. This, again, means less money flowing into Social Security.
The 2007-2009 Great Recession has only compounded these challenges. Job losses and weak wage growth reduced payroll tax collections, while difficulty finding work prompted some older workers to claim retirement benefits earlier than they otherwise would have. The slow recovery also weakened the program’s financial outlook.
More recently, updated demographic assumptions have also added to the shortfall. The latest Social Security Trustees Report highlighted how lower projected birth rates and immigration have weakened the program’s funding outlook by reducing the expected number of future workers.
These and other changes can help explain why the program’s finances have fallen short of the expectations behind the 1983 agreement.
What this means for you.
Without congressional action, Social Security benefits will need to be cut by 22% as soon as 2032 to balance the program's revenue with benefits. For someone scheduled to receive $2,000 a month, that would mean $440 less in their pocket.
To fix this, Congress will need to weigh changes to revenue, benefits, or both. Depending on the approach, some people could pay more in taxes, receive less in benefits, or experience a combination of the two. Each option involves trade-offs over who bears the cost and how quickly changes take effect.
Everyday Americans have a role in shaping those decisions. Understanding how the program works — and what different proposals would mean — is a starting point for informed conversations about its future.
Explore our Social Security policy primer to understand the options and subscribe to our newsletter for updates on the latest policy developments.
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