Attention has recently been focused on the Social Security cost-of-living adjustment (COLA) for 2025 and its impact on benefits in the upcoming year. Starting in January, benefit payments will increase, but the exact percentage of this increase will not be known until the COLA is announced on October 10. The adjustment will provide short-term financial relief to retirees, but there are long-term concerns for those who anticipate receiving benefits for another decade or more, especially given recent projections about Social Security’s future.

Social Security Faces Insolvency Within a Decade

Since 2021, Social Security has been spending more annually than it collects, a trend expected to continue. The program has managed to cover the gap by relying on its trust funds, which still contain excess cash. However, these funds are not infinite. According to a September report from the Congressional Budget Office (CBO), the Old Age and Survivors Insurance (OASI) trust fund—which is responsible for retirement and survivors benefits—is projected to run out of money by 2033. Meanwhile, the Disability Insurance trust fund is estimated to last until 2064.

If the two trust funds were combined one of the possible solutions to increase the longevity of the OASI fund, they would both be exhausted by 2034. This is largely due to the Social Security Administration distributing significantly more in retirement and survivors benefits than in disability benefits. If no actions are taken by the government, recipients could see their benefits reduced by 23% beginning in 2035, with an additional 5% cut gradually implemented by 2098, after which benefits would stabilize.

Such cuts would be disastrous for millions of retirees, especially for those who lack sufficient personal savings or another steady income source. To provide context, a 23% cut would decrease the current average monthly retirement benefit of $1,920 (as of August) to $1,478, resulting in a reduction of about $5,300 per year. For many retirees, this could mean a significant decline in their quality of life.

Potential Solutions

On the positive side, it is unlikely that the government will allow such a drastic reduction in benefits to take place. Social Security has faced financial difficulties before, most notably in the 1980s and at that time, changes were made that enabled the program to largely maintain its benefit structure. However, those changes came with trade-offs.

Key modifications from that era included:

– Increasing the Full Retirement Age (FRA): The FRA is the age at which a beneficiary can receive the full retirement amount based on their work history. Early claims are allowed but result in reduced monthly payments. Raising the FRA meant that younger claimants faced greater penalties if they chose to start benefits at the same age as older generations did.

– Raising the Social Security Payroll Tax: All workers are subject to a Social Security tax on their earnings, up to a ceiling that is adjusted for inflation (set at $168,600 in 2024). This tax rate is currently 12.4%, divided evenly between employers and employees. Raising this tax lowered workers’ take-home pay each year.

– Imposing Taxes on Some Social Security Benefits: Certain retirees must pay taxes on their Social Security benefits if their provisional income—which is calculated as the sum of their adjusted gross income (AGI), nontaxable investment interest, and half of their Social Security benefits—exceeds $25,000 for individuals or $32,000 for married couples. This tax obligation reduced the income available for some retirees to cover their living expenses.

These measures are similar to the ideas being discussed now to address the current shortfall. However, a clear solution has yet to be proposed. The CBO report indicates that a 4.3% increase in payroll taxes or a permanent 24% reduction in benefits would be necessary to fully resolve the funding issues. Given the significant economic consequences of these options, it is likely that any final approach will involve a combination of different strategies.

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For instance, there could be a modest increase in payroll taxes, along with higher taxes on Social Security benefits for retirees. This kind of balanced approach would distribute the burden more evenly among various groups rather than placing the financial strain entirely on one segment of the population.

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