Each year, the Social Security Trustees release a report on how the program is faring financially. The 2020 report was 276 pages in length, which means the typical American won't be reading it from cover to cover. But one major takeaway from that report is that the program's combined trust funds are expected to run out of money in 2035. And that could be disastrous for current and future beneficiaries alike.

What are Social Security's trust funds?

Social Security has two separate funds it stores cash reserves in:

  • The Old-Age and Survivors Insurance Trust (OASI)
  • The Disability Insurance Trust (DI)

Money gets into these funds when Social Security collects revenue (whether from payroll taxes on wages or taxes on benefits). Much of that money, of course, goes right back out to pay beneficiaries, but when there's a surplus, Social Security can pad its trust funds and invest that cash for added growth. In fact, the program is actually required to invest its excess cash.

Loose pile of Social Security cards


Here's why those trust funds are important: They can be used when Social Security has a revenue shortfall on its hands, and owes more in benefits than it collects in income.

Think about your personal savings account. You may prefer to avoid tapping it and instead set up a budget that allows your paycheck to cover your ongoing expenses. But if you have a month here and there when unexpected bills create a scenario where you owe more money than your paycheck delivers, you can tap your savings to make up the difference.

Social Security can do the same with its trust funds, and in the coming years, by all projections, it will have to. That's because the program expects to owe more in benefits than it collects in revenue due to the anticipated mass exodus of baby boomers from the workforce, coupled with not enough replacement workers to compensate.

Remember, Social Security gets the bulk of its funding from payroll taxes. When there's a smaller workforce, the program collects less payroll tax. And when all of those seniors who leave the workforce start collecting benefits, Social Security will need its trust funds to stay afloat.

What happens when the trust funds run out?

Once Social Security's trust funds run out of money, the program won't have enough incoming revenue to sustain benefits at their projected level. As such, Social Security may have no choice but to cut benefits to the tune of 21%.

That sort of hit could be catastrophic for seniors who count on those benefits for the bulk of their income. It could also be extremely harmful to future seniors who are unable to save well for retirement and expect to fall back on Social Security to compensate.

Keep in mind that 21% actually represents a larger reduction in benefits than the Social Security Trustees called for in 2019. Last year, a 20% cut was on the table, but it's since increased. And while a 1% increase may not seem like a huge difference, to seniors on a fixed income, it is.

Are Social Security cuts definitely going to happen?

The good news out of the most recent Trustees report is that nothing in it is technically set in stone. Depending on how things shake out in the coming years, we may see the trust funds' depletion date get pushed back by a number of years, or see the percentage of benefit reductions decline. Not only that, but lawmakers are invested in saving Social Security from a scenario where it has to cut benefits, so Congress may indeed intervene with a fix well ahead of the trust funds' anticipated depletion date.

For now, however, a potential reduction in benefits is a good thing to keep on your radar, especially if you're years away from retirement. Knowing that's in the cards could prompt you to ramp up your retirement savings -- and spare yourself financial troubles in the event that benefit cuts do indeed come to be.