Social Security receives the bulk of its funding through payroll taxes collected from current workers. This source of funding was threatened when President Donald Trump indicated he'd prefer to eliminate the payroll tax after the election and instead provide money for Social Security through the general federal budget.

With the presidential election called for Joe Biden, this plan to change Social Security's funding source is off the table. However, this doesn't mean that future retirees can put aside all of their worries about their benefits. The reality is that there are still some serious financial problems facing this important entitlement program in the future -- and they could lead to benefit cuts sooner rather than later. 

Social Security card with money sitting underneath it.

Image source: Getty Images.

There's a real chance future retirees could see smaller Social Security benefits

Social Security is facing financial trouble because its trust fund is expected to run short soon. The most recent Trustee's report projected that the combined trust fund for Social Security retirement and disability benefits could run dry in 2035. However, because of the economic effects of COVID-19, some estimates think it could be depleted even sooner

When the trust fund runs out, that doesn't mean an end to benefits -- but it means they can be paid only out of revenue coming in. And there's simply not enough of that to fulfill the program's promises. In fact, without action on the part of lawmakers, the depletion of the trust fund is projected to lead to a 24% cut to benefits in 2035. This is not because of President Trump's proposed tax cut -- it's simply what would occur if the trust fund is depleted. 

Of course, Congress could take action to appropriate more money, but that would require the political will to make this move. Some lawmakers may not be willing to divert billions to retirement funding on an ongoing basis without reforms to Social Security to make it more financially sound. The problem, however, is that most proposals to stabilize its finances could also lead to cuts.

For example, raising the retirement age has been floated as a possible option. But if this happens, workers will either miss out on some months of income because they'll be forced to retire later to get the same benefits they now receive at a younger age, or will have to accept a smaller benefit because they're hit with more early filing penalties or get fewer delayed retirement credits. 

Another option, proposed by President-elect Joe Biden, would involve expanding the payroll tax for high earners in order to provide more funding for Social Security without a benefit cut. However, even if this proposal passes, which is far from a sure thing given the very real possibility the Senate will remain in Republican hands, it may not be enough by itself to ensure Social Security remains solvent without other changes. And the longer the delay before action is taken, the bigger the tax increase or the larger the cuts would need to be. 

The bottom line is that both current and future retirees need to be aware that the threat of a reduced Social Security benefit still looms, even though President Trump's proposed payroll tax cut won't occur. To hedge against the possibility of falling benefits, those who are still working should aim to increase the amount they're saving for retirement. Current retirees, on the other hand, should make sure to maintain a safe withdrawal rate from retirement accounts, as they may need this money more than ever in the future.