Last month, seniors learned they'd receive an 8.7% Social Security cost-of-living adjustment (COLA) for 2023. That will add an extra $147 to the average benefit check beginning in January. While some may have wished for more, this will still help ease the pain for retirees struggling with inflated costs on pretty much everything this year.

But that extra cash now could leave seniors facing even bigger problems in a few years. Here's what you need to know.

Serious person looking at tablet.

Image source: Getty Images.

Social Security's not in great shape

You've probably heard people say that Social Security's running out of money. That's led many to assume that benefits aren't going to be around for them when they retire -- but that's not true.

The program receives funding from three sources:

  1. Social Security payroll taxes that all workers pay on the first $147,000 they earn in 2022 ($160,200 in 2023)
  2. Social Security benefit taxes that seniors pay if their income exceeds certain thresholds for their tax-filing status
  3. Interest earned on money in Social Security's trust funds

Payroll taxes provide the bulk of Social Security's money, and they're not going anywhere. Neither are the benefit taxes that some seniors pay. It's possible the latter could even bring in more money over time as larger average checks force more seniors to pay taxes on their benefits.

But Social Security's trust funds have dwindled as an increasing number of baby boomers have exited the workforce to claim benefits, leaving fewer workers behind to pay Social Security payroll taxes. The latest Trustees Report, which was released in June 2022, predicted the trust funds would be depleted in 2035 unless the government intervenes before then. After this it would only be able to pay out about 80% of scheduled benefits.

That was the best estimate at the time, but an 8.7% COLA could speed up that deadline. The program will pay out even more benefits in 2023, and this could deplete the trust funds faster than expected.

But nothing's set in stone yet

We won't know what effect the 8.7% COLA has on Social Security's long-term funding until we see the new Trustees Report next June. But regardless, there's probably still going to be time left for the government to avoid serious benefit cuts.

Most Congresspeople agree that Social Security's funding crisis is a problem that needs solving, but right now there's disagreement on how to do that. Some possible strategies it might use include:

  • Increasing the Social Security payroll tax rate (currently 12.4%, split evenly between employee and employer)
  • Raising the full retirement age (FRA), which determines when a person qualifies for the full benefit they've earned based on their work history
  • Increasing the ceiling on income subject to Social Security payroll taxes
  • Slashing benefits for some or all beneficiaries

It could also use a combination of the options above. There's no way for us to know right now. That's why it's a good idea to take steps to reduce your reliance on Social Security whenever possible. This could involve getting a part-time job or stepping up your personal savings while you're still working so you have a larger nest egg to fall back on in retirement. 

You should also stay up to date on any changes the government makes to Social Security in the next few years. Hopefully, things will take a turn for the better -- but for now, all we can do is wait and watch.