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Cygan: Here are some surprising facts about Social Security
Social Security may seem like a boring topic, but it holds some surprises! You may have already heard that the Social Security Board of Trustees announced on June 9 that Social Security benefits will likely be reduced by 22% by the fourth quarter of 2032 unless Congress makes some changes. For all retirees 鈥� and everyone hoping to retire some day 鈥� this is noteworthy. But the surprises are in the details.
Social Security was enacted by President Franklin D. Roosevelt in 1935. The program began during the Great Depression to provide a financial safety net for retired Americans, beginning at age 65. Taxes were collected beginning in 1937. Initially, Social Security was for wage earners only, but it was later expanded to include survivor鈥檚 benefits for the retiree鈥檚 spouse and children.
Why is there a shortfall?
Fast forward to 2026, when the shortfall in Social Security funds is being attributed to: Americans living longer; a declining birth rate; President Donald Trump鈥檚 2017 Tax Cuts and Jobs Act and his 2025 One Big Beautiful Bill Act; and immigration changes. Let鈥檚 break it down.
No one disputes the 鈥渨e鈥檙e living longer鈥� argument. The average mortality rate for men and women who live to be 65 is 83 for men and 85 for women. Fertility trends are expecting birth rates to decline from 1.9 children per woman in the US to 1.75. This will reduce the number of people paying into the Social Security Trust Fund in the future.
Here is where I found some surprises: The Social Security Trust Fund receives money from three sources: payroll taxes (6.2% payroll taxes from the employee for Social Security and Disability combined and another 6.2% from the employer), income taxes on Social Security benefits (from people already receiving benefits) and interest on invested Social Security Trust Fund reserves. Trump鈥檚 recent tax reductions included provisions that lowered the amount of income taxes that some retirees must pay on their Social Security benefits.
I was also surprised by the claim that the current administration鈥檚 mass deportation of immigrants is negatively impacting the future of Social Security. According to Shai Akabas, vice president of economic policy at the Bipartisan Policy Center, 鈥淢ost immigrants lacking legal status in the U.S. pay payroll taxes but are ineligible for Social Security benefits, meaning they contribute more to the program than they take out, which helps narrow the financing gap.鈥�
Here鈥檚 another surprise: Social Security benefits increase each year based on the cost of living, which is impacted by inflation. If the war in Iran causes inflation in the U.S. to increase, this will raise the cost-of-living adjustment on Social Security benefits, which will cause the Social Security Trust Fund to be depleted even sooner (currently estimated for the fourth quarter of 2032).
Potential solutions
Retirees do not want their Social Security benefits reduced, so significant steps must be taken. Here are some strategies that have been proposed:
Remove the wage cap. Currently, only income up to $184,500 per wage earner is subject to the payroll tax. Although this would provide significant benefits, it is estimated that only 6% of workers earn over $184,500.
Increase the payroll tax by 4.25%. This was recently proposed by the Social Security Board of Trustees. Of course, a lower increase could also help.
Tax overall income for high net-worth people. The argument is that those who are extremely wealthy have high income from investments that are not taxed for Social Security because only wages are taxed.
Enact a wealth tax for very high net-worth people. This would likely help reduce the overall deficit and our current $39 trillion debt in the U.S., rather than specifically going to the Social Security Trust Fund.
Reduce Social Security benefits for current retirees and/or future retirees.
Change the calculations for determining benefits. Consider lowering Social Security benefits for wealthy people. Or modify the cost-of-living calculations to reduce annual increases.
Raise the full retirement age to 68 or 70. Based on a decision in 1983, it was gradually increased from 65 to the current 67.
Let people invest their own money (or a fixed amount from the government) for Social Security. This is much like 401(k)s replacing defined contribution pensions over the past 20 to 40 years.
Based on the severity of the 22% projected shortfall in only six years, a combination of the above strategies will likely be needed.
Which solutions do you prefer? Do you have other ideas not listed? Send me your thoughts, and I鈥檒l report back on them in a future article.
Donna Skeels Cygan, CFP庐, MBA, is the author of 鈥淭he Joy of Financial Security.鈥� She owned a fee-only financial planning firm in Albuquerque for over 20 years before recently retiring. She welcomes emails from readers at donna@donnaskeelscygan.com.
