When you have a program that's as popular as Social Security, it's easy enough for rumors to start flying.
You may, for example, have heard that there's a new law that eliminates taxes on Social Security. But that's not true. While the recently passed "big, beautiful bill" comes with a $6,000 tax deduction that will make it so that many Social Security recipients will have the taxes on their benefits fully offset, that doesn't mean those taxes entirely went away.
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Similarly, you may have read that Social Security is on the verge of going bankrupt. That, too, is not true.
Social Security can't go bankrupt because it gets most of its funding from payroll taxes. As long as people continue to work, Social Security can continue to collect money it can then use to pay benefits.
But Social Security is facing some serious financial challenges in the coming years. Here's the latest on what's going on with the program's trust funds, and how you could be impacted once they're out of money.
What are the Social Security trust funds?
Before we talk about what's happening with Social Security's trust funds, it's important to know what they are. Social Security has two trust funds:
- The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits
- The Disability Insurance (DI) Trust Fund, which pays disability benefits
These trust funds can only be used to pay benefits, as well as administrative costs related to Social Security. Any money that's in those trust funds that isn't needed immediately is invested in special Treasury bonds.
What's happening with Social Security's trust funds?
In the coming years, Social Security expects its costs to exceed its revenue as baby boomers retire in droves. Social Security will be able to rely on its trust funds to keep up with scheduled benefits for a period of time, until those trust funds run out of money.
The latest Social Security Trustees report has the OASI trust fund running out in 2033. At that point, the Trustees think only 77% of benefits will be payable.
Meanwhile, the combined OASI and DI trust funds are expected to run out of money by 2034. At that point, 81% of benefits will be payable.
It's not clear as to whether Social Security will actually merge both trust funds, and combining them would require lawmaker approval. However, it's an option.
Either way, though, it seems like Social Security cuts could very well be on the table as early as 2034. That's a scary thought considering that's less than a decade away.
Are Social Security cuts guaranteed?
It is not an absolute given that Social Security will be cutting benefits in 2034, or whenever its trust funds are emptied. Thankfully, lawmakers have different options they can look at for preventing a broad reduction in benefits, which is something that would no doubt hurt current and future retirees alike.
However, it's best to prepare for Social Security cuts in case lawmakers don't end up stopping them from happening. And your approach to doing so will likely depend on your stage of life.
If you're retired already, downsizing and cutting spending may be your best bet. If you're still working, you can prioritize IRA or 401(k) plan contributions, and/or make lifestyle changes to free up money for long-term savings.
Of course, it's worth noting that the timing of Social Security's trust funds depletion date could change, depending on how much revenue the program takes in between now and 2034. It's a good idea to keep tabs on what's happening with Social Security so you're able to prepare as best as you can.
