The legislation that created Social Security dates back 87 years. Since the program made its first payment in 1937, hundreds of millions of Americans have received benefits. Indeed, the vast majority of those receiving Social Security count on it for the majority of their retirement income.

Given the importance of Social Security to the financial health of a vast swath of the American public, news of the program's dire financial straits is alarming. Due to demographic shifts in the population, Social Security is now paying out more in benefits than it receives in revenue from payroll taxes and other sources.

Currently, the Social Security Trust Funds are making up the difference, but the trillions they've set aside won't last forever. Here's what the trustees of those trust funds believe must be done in order to shore up Social Security's finances -- and why so many are skeptical that lawmakers in Washington will have the political will to get the job done.

The financial crisis that's coming

Until now, Social Security has done a good job of collecting enough revenue to sustain outgoing benefit payments. Indeed, the trust funds that support Social Security now have enough money to cover 230% of the anticipated annual cost of the program for 2022.

U.S. Capitol Building as seen from slightly off-center.

Image source: Getty Images.

That cushion might seem ample but is projected to decline rapidly. Because the large baby-boom generation has now largely retired, there are fewer workers supporting a larger number of people receiving Social Security payments. As a result, trust fund balances will likely decrease from $2.85 trillion at the beginning of 2022 to $1.25 trillion at the end of 2031.

By 2035, trust fund reserves will be entirely depleted. With no further contributions from the trust funds to shore up Social Security's finances at that point, the revenue sources currently available to Social Security would only be enough to cover 80% of scheduled benefits. Those figures assume that Social Security could tap disability insurance reserves to pay old age and survivor benefits; otherwise, the specific trust fund designated for retirement benefits would actually run out of money a year earlier, in 2034.

Here's what lawmakers have to do

The trustees propose solutions to ensure Social Security's long-term financial survival. However, the solutions aren't easy.

One choice is for lawmakers to impose an increase to the payroll taxes collected to support Social Security. Currently, employees pay 6.2% of their paychecks up to $147,000 in Social Security payroll taxes, with employers matching that amount out of their own pockets. Self-employed individuals pay the full 12.4% total amount. To cover the projected funding gap in 2035, payroll-tax rates would have to rise immediately to a total of 15.64%, with employee portions rising to 7.82%.

The other choice is to accept benefit cuts. If reductions in benefits were applied right now to both current and future beneficiaries, it would take a 20.3% cut to keep the trust funds solvent. If cuts were applied only to future beneficiaries, an even deeper 24.1% reduction would be necessary.

Any delay would be even more costly. If lawmakers wait until 2035 before acting, it would then take an increase of payroll taxes to 16.47% or a 24.9% reduction in all benefits to keep the trust funds solvent through close to the end of the 21st century.

An unbridgeable gap?

Currently, lawmakers aren't even close to coming up with any sort of compromise to resolve Social Security's financial woes. Some even want to increase Social Security benefits, looking to fund measures with broad expansions in the amount of income subject to payroll taxes.

Even most of those who want reduced Social Security spending aren't willing to propose outright reductions in payouts. Most proposals look at more indirect measures to rein in benefits, including further increasing the full retirement age to 70. Some lawmakers believe that more fundamental changes, such as privatizing Social Security to allow broader investment beyond Treasury securities, could provide additional financial support.

It's possible that lawmakers could find a way to reach an agreement. It happened in the early 1980s, even with Congress and the White House divided across party lines.

However, what seems more likely is that when the time comes, Washington will simply cover any benefit shortfall with money outside Social Security's dedicated funding sources. That will potentially boost the budget deficit, but that could end up being the most politically viable choice left by the mid-2030s.