Why Congress Has 6 Years to Fix Social Security -- and What Happens if It Doesn't

Social Security has been on shaky financial ground for years, but new research suggests the situation could be even more urgent.

The program relies heavily on payroll taxes to fund benefits, but with that income source falling short, the Social Security Administration has been dipping into its trust funds to cover the deficit.

Previously, the Social Security Board of Trustees estimated that both trust funds would run out by 2034. But a new report from the Congressional Budget Office predicts that they could be depleted sooner than expected. Here's what that means for you.

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The clock is ticking for Social Security

There are several reasons why Social Security is struggling financially. For one, baby boomers have been retiring in droves, increasing the amount Social Security must pay out in benefits. But factors like declining birth and immigration rates also mean there are fewer workers paying into the system, and tax cuts also reduce Social Security's income.

Pulling money from the trust funds to bridge the gap was always meant to be a temporary solution. Eventually, those funds will run out.

The Old Age and Survivors Insurance (OASI) fund covers retirement benefits, while the Disability Insurance (DI) fund is responsible for disability benefits. The Congressional Budget Office estimates in a new report that the OASI fund will run out in just six years, and the combined funds will be depleted by 2033.

What happens if the trust funds run out?

To be clear, the trust funds are only one source of income for Social Security right now, and the majority of the program's funding still comes from taxes. In other words, the program isn't going away entirely. But if the trust funds run out, it could lead to benefit cuts.

According to the Congressional Budget Office, the cuts may be phased in gradually. Once the OASI runs out in 2032, retirement benefits would theoretically be slashed by 7%. Between 2033 and 2036, benefits could be cut by an average of 28%.

None of this is set in stone, as it will be up to Congress to either find a solution to Social Security's cash shortfall or determine how to handle benefit cuts. But with only six years left to implement changes, lawmakers will need to act quickly to avoid hurting retirees.

Potential solutions to avoid benefit cuts

There are plenty of proposals to fix Social Security, each with varying degrees of effectiveness. One of the more popular ideas is to end the wage cap and tax the highest earners.

Right now, only income up to $184,500 per year is subject to Social Security taxes. This means that workers earning $200,000 per year contribute the same amount into the system as those earning $200 million per year. According to a 2022 report from the University of Maryland, taxing income above $400,000 per year could reduce Social Security's cash shortfall by around 61%.

Other potential solutions include raising the full retirement age, increasing the payroll tax itself, or reducing benefits for high earners.

Again, all of these solutions are simply proposals right now, as Congress is still debating how to manage the trust funds. But with the clock ticking, it's even more important for Washington to find a solution soon.

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