Social Security Retirees Just Got Bad News

Although Congress has yet to act, it is well known that Social Security's rainy-day funds will soon run dry, and revenue from Social Security's payroll taxes will not be enough to cover projected future benefits.

Each year, the board of trustees of the Federal Old-Age and Survivors Insurance (OASI) Trust Fund and the Federal Disability Insurance (DI) Trust Fund releases annual reports, updating the country on the financial situation of the trust funds and the Social Security program as a whole. While the message over the years has been fairly consistent, the 2025 annual report just gave Social Security retirees bad news.

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Insolvency quicker than expected

Social Security has begun to encounter financial challenges due to shifting demographics. More baby boomers are reaching retirement, and there are fewer young workers than there once were to pay taxes into the system. According to the Population Reference Bureau (PRB), the population of Americans age 65 and older is expected to jump from 58 million in 2022 to 82 million in 2050. Their proportion of the population is projected to increase by 6% to 23%.

When revenue from Social Security payroll taxes can no longer cover scheduled benefits, the Social Security Administration draws from the OASI trust fund, which it has been doing for a while now. Once that fund is tapped, it can get approval from Congress to draw from the much smaller DI fund.

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Last year's trustees report indicated that when accounting for both trust funds, Social Security's reserves will be depleted by 2035, at which point revenue generated from Social Security taxes would be enough to cover only 83% of scheduled benefits at that time.

This year's report suggests an expedited timeline. The trust funds are now expected to be depleted by 2034, at which point there will be enough tax revenue to cover only 77% of scheduled benefits, significantly lower than last year. It's common for the annual reports to show different projections, but this year was heavily affected by a new Social Security law that will either increase benefits or provide benefits to retirees who may not have previously received them.

The Social Security Fairness Act eliminated two provisions: the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). Both provisions reduced or eliminated benefits for some federal and state workers who received pensions from jobs that didn't necessarily pay Social Security taxes. The group includes teachers, firefighters, and police officers in many states, as well as federal workers under the Civil Service Retirement System and workers under a foreign social security system.

Additionally, the annual report noted changes in assumptions, including a longer recovery in fertility rates off of current low levels and slightly lower long-term wages as a percentage of gross domestic product, resulting in lower payroll taxes.

Congress is likely to act...at some point

Given the number of voters who claim Social Security, I think most Americans expect Congress to eventually shore up the program, even if they leave it to the very last minute. A sizable portion of Social Security retirees relies on benefits as the primary source of income, so any potential cuts could lead to a crisis among this population if they no longer have the funds needed to cover critical expenses, such as housing, healthcare, and food.

Like most other financial issues, the main ways to solve Social Security are to cut benefits or raise taxes. Social Security payroll taxes are currently 12.4%, evenly divided among employers and employees. Self-employed employees must cover the total amount on their own. Republicans typically favor curbs to the program, such as raising the age at which retirees can claim full benefits, while Democrats seem largely in favor of tax hikes.

Taxes are only levied on a maximum of $176,100 of a worker's income (in 2025), so Congress could raise this cap to cover the shortfall or increase taxes on the wealthiest Americans. Either way, difficult decisions will need to be made over the next eight or nine years.

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