Will Social Security run out? Here's what could happen to your benefits

The financial future of the more than 70 million Americans who receive Social Security benefits is slightly more secure than anticipated, according to the agency's annual trustees report, released May 6: The trust fund reserves used to pay beneficiaries are projected to become insolvent in 2035, a year later than previously projected.

Social Security will still exist after 2035, according to the trustees' findings, but retirees will only receive 83% of their full benefits. Preventing that shortfall requires congressional action and would likely involve trimming benefits or increasing the Social Security payroll tax.

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Social Security is funded through payroll tax deductions paid by both employees and employers. In tax year 2024, payroll taxes are applied to the first $168,600 of an individual's yearly income.

The Social Security tax applied to both employees and employers is 6.2% of an employee's paycheck — or 12.4% in total. (Self-employed individuals pay the entire 12.4% themselves.)

When you contribute to Social Security, the money doesn't go to a specific fund allocated to you: Workers are paying into a system that pays for current retirees' benefits. For every dollar you pay in, 85 cents goes towards the Social Security trust fund, according to the Social Security Administration.

The other 15 cents goes to a separate fund that pays benefits to people with disabilities and their families.

According to the trustees' report, the Social Security Administration will run out of its reserves in 2035. Without congressional action, the fund will then only be able to pay out 83% of retirees' full benefits.

Social Security is one of the few programs that enjoys broad support across the political spectrum: In a 2024 AARP survey of Americans age 50 and older, 90% of respondents call it very important.

While it's intended to supplement peoples' retirement savings, about half of all seniors get at least 50% of their retirement income from Social Security, according to the Center on Budget and Policy Priorities.

Social Security has been referred to as part of the "three-legged stool" retirement, alongside personal savings and worker contribution plans like 401(k) plans and IRAs. 

In addition to meeting its current obligations, the Social Security fund must also account for the annual Cost of Living Adjustment (COLA): To help beneficiaries maintain their purchasing power, the Social Security Administration announces the COLA for the following year's benefits.

The yearly adjustment is based on the change in the Labor Department's Consumer Price Index from the third quarter of the prior year to the third quarter of the current year.

The COLA for 2024 is 3.2%, which works out to an average increase of $55 per check for the nearly 67 million Americans who receive benefits. This increase began with December 2023 benefits, which were paid in January 2024. 

Changes to Social Security benefits and revenue sources need to come from Congress. There are different strategies but most involve one or more of the following:

• Cutting benefits
• Increasing the payroll tax (or the income limit).
• Increasing the age at which taxpayers can claim benefits

The last time Social Security faced a reserve deficit was in 1983. Bipartisan legislation increased the full retirement age from 65 to 67 and charged income tax on Social Security benefits.

When it comes to saving for retirement, it's essential to start as early as possible. Experts recommend setting aside between 10% and 15% of your paycheck, but you can start small and increase over time. If you have outstanding credit card bills or student loans, clearing those debts may take precedence.

401(k) plan

A 401(k is a retirement investment account sponsored by an employer. Contributions are tax-deferred, so they can lower your taxable income the year they're made and give you more to invest. If your company matches 401(k)s, maxing out your contributions should be the priority. Many employers will match between 2% and 4% of an employee's annual salary. 

IRA

An individual Retirement account (IRA) is another investment option, but it's not connected to your employer and typically has more options.

Like a 401(k), a traditional IRA is tax-deferred and contributions can be tax-deductible, funds in the account grow tax-free, but withdrawals are subject to income tax when you take distributions. CNBC Select tapped Charles Schwab, Fidelity and Betterment as among the top picks for IRAs.

A Roth IRA is an after-tax account, so you don't have to pay taxes on your gains later. Ally Invest and Wealthfront rank among the best options for Roth IRAs.

There are also robo-advisor services that can build a portfolio for you based on your risk tolerance and time horizon and rebalance as you get closer to retirement. Top robo-advisors include E-Trade and SoFi.

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The Social Security trustees board predicts the agency's reserves will run out in 2035. Without action by Congress, recipients of Social Security benefits would then only receive 83% of their full benefits. Most Americans agree Social Security is a vital public service — and nearly half of seniors count on their Social Security checks for at least 50% of their retirement income.

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