Here's Exactly How We Fixed Social Security the Last Time It Was Running Out of Money

Social Security isn't exactly in the best financial situation. Although it ended 2025 with nearly $2.6 trillion in reserves, the program is running a rapidly widening deficit. According to the latest projections, Social Security's trust fund reserves are expected to be depleted in 2032. If no action is taken, across-the-board benefit cuts would be necessary.

The good news is that history tells us that something will be done. It would absolutely make things easier in the long term if solutions were put in place while we're still years away from depletion, but that isn't strictly necessary. In fact, the last time Social Security was in danger of running out of money, a ninth-inning solution is exactly what happened.

Image source: Getty Images.

How we fixed Social Security last time

In 1983, Social Security's trust fund was rapidly declining and was just a few months away from being unable to pay all of its promised benefits. This created the political urgency to get a deal done, and after some back-and-forth negotiations, the Republican administration and Democratic leaders in Congress reached an agreement.

This led to the 1983 Social Security Amendments being signed into law by President Ronald Reagan, which made the following changes:

• It increased the full retirement age from 65 to 67, with the change phased in over several decades. In fact, the first people to reach full retirement age at 67 will get there in 2027.
• There were payroll tax increases already scheduled, but they were implemented more quickly after the Social Security Amendments were signed into law. This is where the current 6.2% payroll tax rates on employers and employees came from.
• The amendments made some of the higher-income retirees' Social Security benefits taxable for the first time. Today, as much as 85% of the benefits of higher-income retirees can be taxable, and this legislation is what made that possible.
• Annual cost-of-living adjustments (COLAs) were delayed by six months, saving Social Security about $40 billion throughout the 1980s.
• Social Security coverage was expanded to newly hired federal employees beginning in 1984, which increased the number of workers paying into the system.

Why we're here again

The Social Security Amendments of 1983 were expected to keep Social Security solvent for 75 years, so the program should have theoretically been fine until 2058. So, why is it now expected to run out of money in 2032?

The answer is that the Social Security Administration made the 75-year estimate based on the current demographic conditions at the time. Americans not only have longer life expectancies now, but, with the massive baby boomer generation reaching retirement age, there are significantly fewer workers per Social Security beneficiary than in the early 1980s.

How will we fix Social Security this time?

There are many different changes that have been proposed to Social Security, with most falling into one of two baskets -- benefit reductions or tax increases. We could raise the full retirement age again, reduce benefits for high-income retirees, increase the payroll tax, raise or eliminate the taxable wage cap, or a number of other solutions. There have also been some outside-the-box solutions proposed, such as allowing some of the trust fund assets to be invested in the stock market instead of just Treasury bonds.

The most likely solution will involve some combination of changes, but there's no way to know exactly what that combination might be. Hopefully, we won't wait until the clock is about to run out to fix the problem, as any solutions wouldn't need to be as drastic while the program still has substantial reserves, but history tells us that something can and likely will be done.

The Motley Fool has a disclosure policy.