Social Security’s Trust Fund—the financial reserves for the Social Security system—are projected to be depleted by the mid 2030s due to a growing imbalance between inflowing tax contributions and outflowing beneficiary payouts¹. Figure 1 demonstrates how the imbalance is changing net increases to dangerously low levels, and soon to be negative levels. This looming insolvency crisis threatens the promised benefits for all current and future retirees, survivors, and disabled people. For current and future U.S. citizens, all of whom are mandatory participants of the system, this insolvency crisis poses a troubling challenge that requires immediate action.

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How does Social Security work?

Before diving into the issue, let’s explore the inner-workings of Social Security and what it achieves. First, picture the hypothetical challenges posed by the absence of Social Security:

You’re in your 60s, nearing your well-deserved retirement. You’ve worked for countless decades of your life and saved what you could; now it’s time to step away. But there's a nagging thought in the back of your mind: What if I live another 30, 40 years? Will my savings last me? You start doing the math, and the numbers don’t add up. The savings you’ve set aside won’t cover your living expenses well into your 90s. What do you do?

Some may not take that risk of outliving your savings supply, and decide to work more years to ensure more savings. Others may take the risk, but will grapple with the bleak thought of a future without money. For either case, there’s no clear ‘winning’ scenario.

U.S. Social Security addresses your problem by providing a simple, powerful promise: no matter how long you live, you’ll earn a reliable monthly income after retirement courtesy of the Social Security Trust Fund. Simply put, Social Security promises baseline financial security for the rest of your life after retirement.

And since its roll-out in 1942, Social Security has provided generations of retirees, disabled citizens, and their survivors with financial security through monthly paychecks. In 2023, for example, 67 million people received those Social Security paychecks, amounting to $118 billion to all beneficiaries³. Where does Social Security get all this money?

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Social Security is funded through the Federal Insurance Contributions Act (FICA) tax—a payroll tax collected from working individuals and their employers. All U.S. citizens (including certain non-U.S. citizens) are required by law to contribute a share of their earnings to the Trust Fund. For companies with employees and employers, the employee pays 6.2% of their paycheck, and the employer pays the remaining 6.2%. Self-employed workers must pay the full 12.4%. The combined FICA contributions are then distributed to pay retirees, the disabled, and their survivors, with a vast majority distributed to retirees⁵.

The Social Security Administration uses two primary functions to calculate the benefit amount distributed to beneficiaries: average indexed monthly earnings (AIME) and primary insurance amounts (PIA).

Because benefit amounts reflect how much money you ‘put into the system’ while you worked, benefits are drawn from your 35 highest years of earnings. Say you worked 40 years; the first five were spent in lower-wage jobs while the last thirty-five were spent in a high-wage career position. Your benefits, then, will be calculated using only the amount you earned over those thirty-five years in that high-wage job. The total amount you earned over those thirty-five years, then, is divided into a monthly amount. This amount is your AIME.

Your AIME, then, is applied to a “bend-point” formula to calculate your primary insurance amount (PIA)— the amount you get in your monthly check. This formula changes year to year, but it defines what percent of your old earnings social security will give you back. For 2024, this means that all dollars you earned up to $1,174, you will get back 90% back. For dollars between $1,174 and $7,078, you earn back 32%, and for dollars beyond that you earn back 15% up to the maximum benefit amount ($3,822 for full-retirement). This maximum is defined by whether you retire early for your respective year of birth.

Furthermore, Social Security relies on a delicate balance between the size of the workforce and the number of retirees at any given time. Taxes are collected from the current workforce to support current retirees and other pensioners; when workers retire, the working class of that time support their retirement, then. This pay-as-you-go structure requires an inflow of funds that matches or exceeds the total payout to beneficiaries.

Why is the Trust Fund Running Dry?

Currently, Social Security is on track to run out of full funding by 2035 as projected by the Office of Retirement and Disability Policy and CNBC⁶. This is because over the past decade, money outflows for beneficiaries’ payouts has gradually become larger than money inflows from FICA tax contributions. This imbalance is squeezing the Trust Fund dry, and leading towards insolvency.

A main reason the Trust Fund is running dry is because there is an imbalance between workers and beneficiaries.

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Dramatic declining birth rates are creating a population imbalance between retirees and the working age population. This is particularly exacerbated as members of the Baby Boomer generation retire in droves, creating an unprecedented surge in beneficiaries while the working age population struggles to keep pace. There are not enough workers, then, to match the payouts of a large number of beneficiaries.

On top of this generational demographic disparity, people from newer generations are increasingly entering the workforce later than the previous generation, largely due to a shifting norm that values higher education.

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Over the past half-century, as the proportion of 20-24 year old individuals enrolling in college is increasing, the proportion of them in the workforce are declining. This demonstrates that those individuals have decided to enter the workforce later, and therefore, their contributions to the FICA tax are also delayed. This delay reduces the money inflow into the trust fund in the short term. However, a notable caveat is that higher education enrollment leads to a workforce with a higher median income that may increase FICA contributions in the long run.

Declining birth rates and increasing delayed workforce entry rates are both reasons for the mismatch between the number of Social Security contributors and withdrawers. This mismatch creates a disparity between money inflows and money outflows of Social Security’s Trust Fund, forcing the Social Security Administration to begin withdrawing funds from its reserves to maintain promised payouts for current retirees and other beneficiaries.

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Considering the trend is projected to continue in the near future, reserves are expected to run dry in the near future. Once these reserves are depleted, Social Security will depend solely on incoming payroll taxes to pay benefits. This income is expected to cover around 75-80% of promised benefits¹⁰. While most payments would still go out, beneficiaries could face a significant 20-25% reduction in their monthly payments, affecting their financial stability¹¹. With this point looming in the near future, the Social Security system's ability to fulfill their commitments is at risk, potentially leaving future beneficiaries without the financial security they were promised.

Who is affected most by this?

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The United States is a land of profound social, economic, and lifestyle inequality. Starbucks’ CEO, Brian Niccol, frequently commutes from California to Washington via private jet, while homeless individuals bunker-down near their coffee shops just to access the internet.

The median cost of a one-bedroom apartment in Wichita, Kansas, for example, is $680/month, while a comparable space in New York set renters back $4,300/month—a 532% increase. Any universal financial system, such as Social Security, will affect citizens differently depending on their income, geographic region, and familial circumstances.

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Analyzing the distribution of Aggregate Gross Income (AGI) in the United States, a few commonly held assumptions about the income of different regions are confirmed. Metropolitan areas indeed exhibit a higher concentration of people within the gross income range that qualifies them for AGI stubs 7 and 8, between $100,000 and $200,000, and $200,000 and $500,000, respectively. Coastal regions also host the majority of large cities, with the notable exceptions of Salt Lake City, Utah and Denver, Colorado. The South, especially the Bible Belt, the region in the southeast, has a greater concentration of earners who submit returns between $10,000 and $25,000 than the North. This confers greater reliance on Social Security in the South, since people who would otherwise live in poverty without government aid are more reliant on Social Security¹⁵.

See Social Security through the lens of fellow Americans

The threat of insolvency has long been talked about in the abstract since macroeconomic figures—at times—are hard to connect back down to the individuals whom they affect. To illustrate what insolvency really means, meet three selected profiles of prototypical beneficiaries of social security. These three, albeit fictional, profiles are drawn using real world cost of living data to show how insolvency would affect millions of Americans day to day, month to month.

The Veteran

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To really understand how Social Security affects the lives of real Americans, let’s first visit the home of Wes Smith, a disabled veteran living in Pasadena, Texas, just outside of Houston.

Wes is a 64 year old Army veteran who joined the military after graduating high school in 1981, serving through the end of the Gulf War, where he was injured and subsequently disabled. After an honorable discharge in 1991, Wes worked a series of low-wage, temporary jobs to get by for over two decades until the COVID-19 pandemic. In 2020, Wes was laid off by his firm due to the pandemic-era downturn, leaving Wes jobless and vulnerable given his history of preexisting conditions. For this reason, Wes has been jobless since 2020, supporting himself and his guide dog, Luna, with his mix of disability and veteran benefits.

Wes’ combat disabilities—PTSD, severe hearing loss, moderate vision loss, chronic back pain, and an immobile ankle— is rated at a 70% disability rating, which means that, in 2024, he will receive $1,716.28 in monthly disability compensation from the VA¹⁸.

In terms of social security, Wes collects benefits from disability insurance (SSDI) because he is not yet retired. Since Wes was born in 1960, his full-retirement age is 67; to receive full retirement benefits, Wes must wait until 2027, then, to formally retire. At that point, Wes’ SSDI benefits will become retirement benefits. His benefit amount will remain the same, but would be paid out from the retiree trust fund instead of the disability fund. This is because both the SSDI and OASI (retirement) systems use the same AIME and PIA structure to calculate benefits. This is in part so that individuals on disability have continuity in benefit levels as they transition into retirement.

Using the SSA’s AIME and PIA formulas, Wes has an average indexed monthly earnings history (AIME) of $908.57, which captures his military wages as well as his civilian wages, which in sum totaled to $381,000 over his working life. Because Wes only worked a total of 28 years—thirteen in the military, fifteen in the civilian workforce—his AIME is relatively low. His benefit amount, then, is 90% of this AIME, meaning he receives $817.71 in SSDI in addition to his $1,716.28 in VA benefits.

Wes’ total monthly income, then, is $2,533.99.

The Houston area has one of the lowest relative costs of living in the U.S.¹⁹, ranking third lowest on the Council for Community and Economic Research’s Cost of Living Index among the most populous metro areas in the country. Using estimates from the Economic Policy Institute’s Family Budget Calculator, we can see the how Wes’ monthly costs fare against the average monthly cost of living in the Houston metro area²⁰:

Even with assistance, it’s clear that Wes is running a tight budget, sparing only $321.99 per month. Over thirty percent of Wes’ income goes to rent alone. Pairing his housing burden with his other financial obligations to support himself and his guide dog, it’s clear Wes is vulnerable to changes in costs of living or changes to his fixed income. That $321.99 in spare cash, then, is not just disposable income but a buffer for changes in the price of rent or, say, groceries under inflation in the short-run.

Now, let’s say the year is 2033–Wes is 77 and on full retirement. This is the year social security is projected to fall short and only be able to pay 79% of scheduled retirement benefits. This means Wes’ monthly social security check of $817.71 will be reduced to $645.99, bringing his total monthly income to $2,362.27.

Assuming no change in Wes’ cost of living, Wes will now only have $150.27 leftover at the end of every month. Now, of course, a lot will change between 2024 and 2033, including the cost of rent, groceries, healthcare, and interest on debt. Under insolvency, Wes’ already strained budget will only get tighter—if not entirely infeasible. Wes, like a majority of veterans, could fall into homelessness as a result of being priced out of his apartment²¹; he could fall further into debt trying to subsist or make difficult trade-offs to his health and well-being just to get by, like getting rid of his guide dog, Luna, or skipping treatment.

For Wes, insolvency would be the difference between living under a permanent roof or not—the difference between crossing the street safely and whether he has one or more meals a day.

The Farmer

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In the rolling hills of Ithaca, New York, the Taylor family's story illustrates how Social Security serves as more than just a retirement program—it's a crucial safety net for America's agricultural community. This case examines how unforeseen circumstances can transform a family's relationship with Social Security from a future consideration to an immediate necessity.

Meet Carly Taylor, a 45-year-old organic farmer in Ithaca, NY, who runs a 120-acre family farm with his husband, George (48 years old), and their 10-year-old daughter, Ellie. The Taylor farm specializes in organic produce, sweet corn, and honey, exemplifying the growing trend of small-to-medium sustainable farming operations in the Northeast. With an annual gross revenue of $175,000, the farm yields approximately $90,000 in net income after deducting expenses such as equipment, seeds, and operational costs.

Last spring, George suffered a severe spinal injury while operating farm equipment, leaving him permanently disabled. This event transformed the family’s view of Social Security from a retirement plan to a critical financial lifeline. George’s disability significantly impacted the farm’s income, forcing Carly to hire additional labor to perform his duties, adding strain to their finances. Social Security benefits now help offset these extra costs.

The Taylor family qualifies for both Social Security Disability Insurance (SSDI) for George and Dependent Benefits for Ellie until she turns 18. SSDI provides benefits to individuals who have worked and paid into Social Security but can no longer work due to disability. Ellie, as George’s dependent, is eligible for up to 50% of his SSDI benefit. Together, the family could receive up to 180% of George’s SSDI benefit, subject to the family maximum limit.

SSDI benefits are primarily based on George’s Average Indexed Monthly Earnings, which reflects his highest 10 years of inflation-adjusted earnings. Since Carly and George co-manage the farm, their income for Social Security purposes is divided equally. Assuming the farm consistently nets $90,000 annually, George’s self-employment income would be $45,000. This results in an AIME of $3,750. Applying the SSDI formula to his AIME, George receives $1,954 per month in SSDI benefits.

As George’s dependent, Ellie qualifies for an additional $977 per month, amounting to 50% of George’s SSDI benefit. In total, the family would receive $2,951 per month in Social Security benefits ($1,954 for George and $977 for Ellie).

While Social Security provides crucial financial support, it does not fully cover the additional labor costs the Taylors incur due to George’s disability. As Carly ages and Ellie remains too young to work on the farm, the family may face growing financial challenges. Without Social Security’s monthly benefits, sustaining their farm and livelihood during these difficult years would be far more precarious.

As the potential insolvency of Social Security looms, the Taylor family’s situation highlights the vital role these benefits play in supporting American families through unforeseen hardships.

The Consultant

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Jill is a 27-year-old Cornell graduate working as a tech consultant in NYC, earning $240,000 before taxes. She does not contact her parents, and she has no partner or children. She owns a car but still rents a studio, and he is still saving to buy a house and pay off his student loans.

While Jill was visiting Cornell to attend an alumni event, she got into a near-fatal car accident. She is now incapable of work, and most of her savings have gone to pay off her medical bills.

Jill can theoretically receive two forms of social security: SSI(Supplemental Security Income) and SSDI(Social Security Disability Income). SSI provides financial income to older adults and people with disabilities, while SSDI delivers financial income to people with disabilities based on their specific disabilities and work credits.

SSI has a resource limit: An individual cannot possess more than $2000 to be eligible for SSI. Although items such as housing, cars, and other living necessities are not counted in that amount, if Jill has more than $2,000 in other properties, like bank savings, he is no longer eligible for SSI. Assuming she still has a small amount of bank savings left over from paying her medical bills, she is no longer eligible for SSI.

Given Jill had worked from college graduation until the day of her accident, she would have satisfied the work credit requirement to receive SSDI benefits. SSDI earnings are primarily based on an individual's past income before becoming disabled. Assuming Jill consistently made $240,000 before taxes for all years, she would have the AIME of $20,000. Then, the monthly SSDI income formula is applied to her AIME income to calculate her SSDI benefits. Given that the maximum monthly SSDI payment in 2024 is $3,822 per month, her estimated monthly SSDI income has surpassed this figure, and therefore, in the best-case scenario, Jill would receive $3,822 each month from SSDI.

Without additional income, familial support, or even a house, Jill depends entirely on social security to provide for her future. If she was lucky, her high earnings could have provided him with a high monthly SSDI check, but she would remain in a precarious financial position. As the insolvency crisis approaches, whether her singular form of income will be capable of sustaining her is a matter of significant concern.

What Next?

As the growth of the US population slows significantly and the balance of working individuals to social security beneficiaries is upended, the strain on the US Social Security system will dramatically intensify, raising the alarming question of whether the program will adequately provide for the retirement of the current generation. The younger generation, while funding the retirement of their elders, may not be able to enjoy the same level of benefits when they retire, and the people hit the hardest would undoubtedly be those already in precarious financial situations.

Policy makers have proposed several solutions to the current crisis facing the US Social Security program, but each is unpopular in their respective ways, leaving the program’s future in uncertainty. What will the U.S. Government do to keep its financial promise? Or will it not?