According to the U.S. Census Bureau, Social Security benefits lifted more than 26 million people out of poverty in 2021, making it the most important antipoverty program in the country. Social Security is also the largest source of income for most seniors, and more than 50 million people aged 65 and older received benefits in January 2023. Suffice it to say the program is a critical source of financial wellbeing for many Americans.

Unfortunately, Social Security is already the largest federal program -- accounting for approximately 20% of federal spending -- and rapidly rising costs are expected to result in a massive funding shortfall in the coming decades. Here's what retired workers need to know.

A Social Security card sits atop a U.S. Treasury check and a fan of $100 bills.

Image source: Getty Images.

Social Security has a $20 trillion problem

The Social Security Board of Trustees publishes an annual report detailing the financial status of the Old-Age and Survivors Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund. The OASI trust fund pays benefits to retired workers, spouses, and survivors, while the DI trust fund pays benefits to disabled workers. Last year, that report reiterated a problem that has been evident for decades: The balance of the combined OASDI trust fund is headed toward zero.

For context, the Social Security program is funded primarily by payroll taxes, and to a lesser extent by interest earned on trust fund assets. The trust fund balance decreased by $22 billion in 2022 because those funding sources failed to offset the cost of paying benefits. The trustees expect that trend to continue for the next 75 years, producing a $20.4 trillion funding shortfall.

The aging population is the driving force behind that problem. Birth rates soared during the baby boom that ran from the mid-1940s and the mid-1960s, then after normalizing for several decades birth rates plunged during the Great Recession. As a result, the ratio of workers to beneficiaries has decline sharply over the years, falling from 41.9 in 1945 to 2.8 in 2021. In other words, the population paying taxes into the Social Security trust fund is shrinking in comparison to the population drawing benefits from the trust fund.

Ultimately, that trend will result in the depletion of the OASDI trust fund, though the exact timing is subject to guesswork. The Board of Trustees estimates depletion will occur in 2035, while the Congressional Budget Office (CBO) believes depletion will occur in 2033.

The good news for retired workers

The synopsis above may seem bleak, but there are two pieces of good news for retired workers and other beneficiaries. First, politicians in Washington are aware of the problem, and a broad continuum of solutions has already been brought before Congress. Lawmakers have yet to take any definitive action, primarily due to differences in political ideology, but a recent study from the University of Maryland indicates that certain proposals enjoy strong bipartisan support among voters.

For instance, an overwhelming majority of Americans are in favor of applying Social Security payroll tax to wages over $400,000, a change from the current law that caps taxation at $160,200. Similarly, most Americans also support raising the Social Security payroll tax rate from 6.2% to 6.5%, meaning workers and their employers would contribute a combined 13% of wages. Those changes would collectively eliminate 76% of the budgetary shortfall.

Second, even in the worst-case scenario -- meaning lawmakers fail to find a solution and the OASDI trust fund does indeed reach zero -- payroll taxes will still cover a significant portion of scheduled benefits. The exact estimates vary from source to source, but the Board of Trustees believes 80% of scheduled benefits would be covered after the trust fund is exhausted in 2035, and the CBO believes 77% of scheduled benefits would be covered after the trust fund is exhausted in 2033.

Put simply, the Social Security program will not disappear even if the OASDI trust fund is exhausted.

The bad news for retired workers

For readers with a sense of déjà vu, the Social Security program faced a similar problem four decades ago. After running a deficit between 1975 and 1981, a special Presidential Commission published a report in January 1983 indicating the trust fund could be exhausted within months. Lawmakers swiftly intervened to prevent that outcome, and the Social Security Amendments of 1983 were signed into law in April with bipartisan support.

Admittedly, the current funding shortfall is more severe. The deficit represents 3.42% of taxable payroll over the next 75 years, while the deficit in 1983 represented 1.80% of taxable payroll over the same period. But retirees can still learn something important from the past. The Social Security Amendments of 1983 ushered in several changes that effectively cut benefits, such as delaying full retirement age and taxing Social Security income. The same result is likely this time around. That may be bad news for some current and future retirees.