Planning to Retire in the 2030s? Read This Before You Collect Your First Social Security Check.

You may have heard that Social Security isn't exactly on the best financial footing, and that's true. Although the Social Security trust funds have trillions in reserves right now, the reality is that Social Security is paying significantly more money to beneficiaries than it is taking in, and the deficits are expected to get far worse in the coming years.

In fact, the latest estimates from the Social Security Board of Trustees project that the combined trust funds for the Old Age and Survivors Insurance and Disability Insurance trust funds will be depleted by 2035 unless something is done.

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While this might sound like an emergency, especially if you're planning to retire in the next decade, it's important to take a step back and put things into perspective. So, here's what Social Security running out of money could mean for you, and what is the most likely scenario.

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The worst-case scenario

For sake of argument, let's say that the latest trustees' report projection happens, and Social Security's trust funds completely run out of money in 2035.

At the end of 2023, the latest year for which we have final data, the Social Security trust funds had a total of about $2.8 trillion in reserves. The program took in a total of $1.35 trillion in income between payroll taxes, taxes on certain Social Security benefits, and interest earned on the reserves, and paid out about $1.39 trillion -- a roughly $40 billion deficit that is withdrawn from the trust funds.

But the key thing to emphasize from that last paragraph is that most of Social Security's benefits are paid from income coming into the program, not from the reserves. So even if the deficits get much larger and the trust funds are depleted in 2035, there will still be payroll and other tax revenue coming in.

In fact, the latest projections found that even if the trust funds are allowed to run out of money entirely, incoming revenue will be able to cover 83% of scheduled benefits.

In other words, in a worst case scenario, if you were expecting a $2,500 monthly Social Security retirement benefit based on your work record (you can view an estimate for yours by logging in at ssa.gov), you would still receive monthly checks of $2,075 even if Social Security was completely out of money.

Why it's likely the problem will be fixed

One big reason Americans are nervous about the Social Security shortfall is that it's been a known problem for a long time. I've been writing for The Motley Fool since 2011, and the Social Security Trustees Report from that year found that the trust funds would be depleted by 2036, just one year later than the current estimate. So why hasn't anything been done?

The short answer is that the ways to fix Social Security are politically divisive, and quite frankly, with a decade or more of financial runway, those in power simply haven't made Social Security reform a priority. To be fair, there have been some significant tweaks, such as eliminating the "file and suspend" loophole a few years ago, but nothing major has been done to extend the program's solvency.

Having said that, it's worth noting that we've seen a similar situation play out before. In the early 1980s, Social Security was just a few months away from running out of money, and the Social Security Amendments of 1983 helped stabilize the program for the next few decades. Just to name one provision, this round of reforms is why the full retirement age has gradually risen from 65 to 67 over the past couple of decades.

The bottom line is that history shows us that something will be done to bolster Social Security's financial situation, even if it happens at the last minute. And while the exact reform package remains to be seen, it's also worth noting that virtually nobody is talking about benefit cuts for those currently receiving payments, or those who are close to retirement age now.

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