Will Social Security Run Out? The 2025 Reality Check

Transcript

Will Social Security run out before you ever get a chance to claim it? This is probably one of the most common questions or concerns I get, and like most videos, when a question comes up enough, it makes a good idea for a video. I don't blame anyone for this being a common concern. For decades, we've been hearing a similar sentiment: Social Security is running out, the trust fund will be empty by a certain year, better claim it while you can. It's hard to know what's real, what to be concerned about, and what's just noise. So today, let's separate signal from noise and get a current status update of where Social Security sits in the back half of 2025.

Before we do that, let's start at the beginning. Social Security was signed into law in 1935, right in the middle of the Great Depression, really because of the Great Depression. At the time, millions of Americans lost their jobs, lost half their savings, and lost their sense of security. So the government stepped in to create a safety net, a way to provide economic stability for a lot of these older Americans who had lost their jobs and most of their savings, to give them a sense of relief and support. Over time, it expanded to cover survivors and disability, which is why today we call it OASDI, Old-Age, Survivors, and Disability Insurance, also known as Social Security.

So we have this Social Security system, and it's funded through the Federal Insurance Contributions Act, or FICA tax, which you may have seen on your paycheck. The rate for FICA tax is 12.4%. If you're a W-2 employee, you pay 6.2% of that and your employer pays the other 6.2%. If you're self-employed like me, you unfortunately pay both sides, so you don't get that employer half. Now, some public employees like teachers and nurses don't pay into Social Security at all, because they're required to pay into their own retirement system, for example OPERS or STRS in Ohio. So they don't pay Social Security tax, but they also don't earn Social Security credits in those years. That 12.4% FICA tax is capped up to a certain income amount, what we call the wage base. For 2025, that wage base is $168,600. Any income above that is no longer subject to Social Security tax.

When those FICA taxes come in, they don't sit in a separate account with your name on it waiting for you to claim. Social Security is a pay-as-you-go system. The taxes collected from today's workers are used to pay this year's retiree benefits. Think of it less like you're paying for someone else's retirement and more like a massive national cash flow system: tax revenue comes in, benefits go out. For decades, we had more money coming in than going out, and that surplus went into what's called a trust fund, a big bucket of extra cash. By law, it can only be invested in US Treasury bonds, so it earns a little interest but is backed by the US government, meaning it's protected. For years, we filled up that bucket with extra tax revenue, until the baby boomers retired and suddenly more money was needed to pay claims than was coming in from tax revenue. So we started running into an annual deficit, which actually happened in 2021. That was the first year Social Security payments were more than the taxes collected, and since then we've been using the trust fund to cover the difference. That gap is expected to keep widening as retirees live longer and there are more of them.

So now you know we're running an annual deficit. How long can we do that? Let's talk numbers. Right now the combined Social Security trust funds, there are actually two, but for simplicity we'll say one, hold around $2.7 trillion, and that's public information, you can find the trustees report online. The 2025 trustees report gives us updated numbers. The main retirement fund is projected to run out in 2033 or 2034 at the clip we're currently going. So if we do nothing, we'll deplete the trust fund, and then the ongoing tax revenue that covers most of the benefits, about 80%, would still be okay. But we'd have a 20% difference to solve for. So even if the trust fund goes to zero, worst case, Social Security doesn't go to zero. We can continue to cover benefits, but only about 80%. Going back to the worst case, if you were planning on a $2,000 monthly benefit, maybe you'd only get $1,500. Not ideal, but not zero. If that trust fund dries up, Social Security checks don't just stop. It just means there's no extra cushion left to cover the difference. So right now, the current worst-case scenario is a 20% benefit cut in some later year.

If you're planning for retirement, especially in that retirement red zone, five to ten years away, it's important to plan conservatively when it comes to Social Security and adapt as we go. In our practice, depending on how far away you are, we might reduce your estimated benefit to plan conservatively. If a cut happens, we planned for it. If not, now we have some extra gravy to work with.

Has this happened before? Of course. This is not new territory. Back in the early 1980s, Social Security was actually weeks away from becoming insolvent, and the headlines were very similar. Then in 1983, President Reagan struck a bipartisan deal with solutions. They raised the payroll tax, going back to that 12.4%, which was lower then, with gradual step-ups. They began taxing benefits for higher earners, and they gradually increased the full retirement age from 65 to 67. That one package bought us about 50 years of runway, which is the runway we're still on, toward the end of, and it's why we probably need a new package. But the pattern has always been the same: crisis, negotiation, compromise, fix. As I like to say, history doesn't always repeat itself, but it often rhymes, and this fix will likely fall into that rhythm.

It's not just me who thinks Congress won't make benefit cuts but rather do something else. Most experts think so too. Social Security accounts for 40% of income for the average retiree, and one in five rely solely on Social Security. So no, I don't think they're going to mess with benefits. As the Committee for a Responsible Federal Budget put it, it's virtually unthinkable that lawmakers would allow tens of millions of seniors to face sudden across-the-board cuts. But the longer they wait, the bigger the fix becomes. And as you probably know, the government isn't always in a hurry to get things done. They'll most likely kick the can. This isn't a hard problem to solve mathematically, but it gets tricky politically, because we're talking about tax rates, and there's risk to whoever brings it to the table. Let's be real, raising taxes anywhere is not normally a winning political strategy. But they'll act eventually. It's not if, it's when.

So how might they fix it this time? Probably similar to the 80s, and yes, it'll most likely mean higher taxes for somebody, probably workers. It's not necessarily fair, but it is reality, so plan through it. The Social Security actuaries even publish a menu of tested options. Here are a few of the biggest levers. One, raise or eliminate the wage cap. Going back to that $168,600 number, only income up to that amount is taxed. They could raise it or eliminate it, which would bring in a lot of extra revenue. Two, gradually increase the payroll tax rate, similar to the 80s, bringing that 12.4% up toward what actuaries would like, around 15%, so about a 3% increase. Three, adjust benefits for higher earners. Four, tweak the cost-of-living adjustment formula. And one interesting one I liked, invest a portion of the trust fund into equities. It's only in Treasury bonds right now, where growth is limited due to lower risk, so maybe we increase the investment exposure of the trust fund, and higher returns could strengthen it, but that one is very unlikely and logistically complex. All of these impact workers in some way, but mathematically they work.

So what does this mean for you? First, don't panic, especially if you're in that retirement red zone, five to ten years from retirement. Social Security is not disappearing. Second, plan conservatively. If you're worried about it, get some help. Talk to an advisor about your strategy for Social Security and what they think might be best. It helps to hear different opinions. Third, don't claim out of fear. When you turn 62, don't claim just because you think it won't be there at 64 or 65. I'm not saying claiming at 62 is a bad strategy, I just don't want fear to be the sole reason you do it. And lastly, always stay flexible. Review and refine every year or two to adapt to the ever-changing landscape. It will always be changing, so we'll always be refining.

So we've been hearing that Social Security won't be there when we get older, or that it's going broke. Hopefully now you know that's not true. They'll eventually do some sort of package, and that package will most likely buy us another 50 to 100 years of runway. Take that for what it's worth. Hopefully this was helpful. If you have questions, concerns, or comments, let me know, reach out. I'd be happy to chat one-on-one. Really, the perspective around this is simple: plan, prepare, adjust, and be present. Get the most out of your wealth today and in the future.

Hosted byNick GeorgeCFP®, ChFC®, CLU®, IWA™FounderView bio →

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