It should come as no surprise that the reserve trust funds for Social Security are running low. This has been an ongoing issue for many years now, and if lawmakers don't act soon, retirees could be looking at a cut to their benefits.

But what did come as a bit of a surprise is that the Social Security program is burning through these trust funds faster than expected. In its annual report, the Social Security Board of Trustees said the Old-Age and Survivors Insurance (OASI) Trust Fund, which is used to fund benefits for retirees and their spouses and certain eligible children, will be depleted by 2033. Meanwhile, if the OASI were combined with the Disability Insurance (DI) Trust Fund, which helps pay benefits to disabled workers and their families, the combined fund would be depleted by 2034.

Both funds are now expected to be depleted one year ahead of schedule. Let's take a look at how this happened and how this will impact Social Security benefits.

Person holding his head while looking down.

Image source: Getty Images.

Reassessing expectations

In its report, the Board of Trustees said it "reassessed their expectations for the economy" due to new data on inflation. Mainly, the board lowered its projections for gross domestic product (GDP) and labor productivity by roughly 3% for 2026 and all years after.

GDP is an important determinant for the Social Security trust funds (at least initially) because higher GDP means higher labor productivity, which leads people to earn more and, therefore, pay more in Social Security taxes. However, keep in mind the board will continue to monitor economic conditions, and the assumptions it is using could always change next year.

So what does this mean for retirees? Well, once these reserve funds are dry, the only thing funding Social Security will be the program's payroll taxes. Employees and employers each pay a 6.2% annual Social Security tax on a worker's earnings, although only up to a certain threshold. Self-employed workers pay a 12.4% self-employment tax. But now, annual payroll taxes are insufficient to cover all scheduled benefits.

If nothing changes, the Social Security Board of Trustees estimates that only 77% of scheduled benefits will be paid out in 2033. The DI Trust Fund is actually in much better shape, and the board does not expect it to become depleted over its 75-year projection period. However, the DI Fund is also catering to a much smaller pool of workers, and when the OASI Fund -- which serves the much larger pool of retirees claiming Social Security -- runs out, there's a chance that lawmakers would either simply reach into the DI fund to pay out benefits or combine the two funds.

In this kind of scenario, the total assets of both funds are projected to be depleted by 2034, at which time only 80% of scheduled benefits will be paid out. The DI Fund certainly makes a difference in terms of benefits coverage, but retirees would still be looking at a 20% cut to their benefits by 2034.

A more pressing need for action

Social Security's shortfall has been a concern for many years now, but this new report should only increase the need for lawmakers to act. While there's been a lot of discussion about shoring up the system, most of the proposed legislation doesn't seem realistic to pass under the current Congress.

If nothing is done and there is a 20% or 23% cut to benefits, that will likely create a number of social, economic, and political issues, which is why this recent report should hasten Congress' resolve to find a realistic solution that the president can sign into law in the coming years.