How Social Security's Trust Funds Work and the Choices Ahead

Every spring, six people sign a long report about money that most Americans never see but almost all of them are counting on. Four of them hold government jobs that come with the duty: the secretaries of the Treasury, Labor and Health and Human Services, and the commissioner of Social Security. The law also provides for two public trustees, one from each party, though those seats have often sat empty. Their annual report runs to hundreds of pages, and nearly everyone who reads it skips straight to a single line: the year in which the main trust fund is projected to run out of reserves. In the report released in June 2025, that year for the retirement fund was 2033. For retirement and disability combined, it was 2034. That is close enough that a child who started kindergarten in 2026 will still be in middle school when it arrives. The number is real. What it means is widely misunderstood.

In short: Social Security is paid for mainly by a payroll tax on wages up to a yearly cap, and surpluses from past decades are held in trust funds invested in Treasury securities. The trustees project those reserves will run out in the early-to-mid 2030s, after which incoming taxes would still cover roughly four-fifths of promised benefits. Congress can close the gap with more revenue, smaller benefits or a mix, and the choice it makes says a great deal about who it thinks should carry the load.

Where the money comes from

Social Security's main source of money is a payroll tax. Workers pay 6.2 percent of their wages and employers pay another 6.2 percent, for 12.4 percent in total. Self-employed people pay both halves. The tax applies only to earnings up to a cap, called the taxable maximum, which was $176,100 in 2025 and rises each year in line with average wages. Earnings above that line are not taxed for Social Security, and they do not count toward benefits either.

Two smaller sources add to it. Since 1984, people with higher incomes in retirement have paid income tax on part of their Social Security benefits, and much of that money goes back to the trust funds. And the trust funds earn interest on the reserves they hold.

This structure was deliberate. Benefits are tied to what you earned during your working life, and the payroll tax is how you earned them. That link is a big part of why the programme has been politically durable since the 1930s: people see benefits as something they paid for, not a handout.

It also means the programme is mostly pay-as-you-go. The taxes withheld from a warehouse worker's paycheck this month largely go out next month as benefits to her grandmother, her disabled neighbour or the children of a worker who died. The trust funds are a cushion on top of that flow, not a giant savings account holding each worker's own contributions.

What the trust funds really are

Social Security technically has two trust funds. The Old-Age and Survivors Insurance fund pays retirement and survivor benefits. The Disability Insurance fund pays benefits to workers who become disabled and their families. They are often discussed together, under the combined label OASDI, because Congress has a long habit of moving money between them when one runs short.

The trust funds hold the surpluses the programme built up over decades when payroll taxes brought in more than benefits cost. By law, those surpluses are invested in special-issue Treasury securities, bonds that the government issues only to the trust funds and that pay interest at market-based rates.

Here critics make a point that deserves a careful answer. They say the trust funds are an accounting fiction: the Treasury spent the surplus cash on other things, and to pay the bonds back it has to tax, borrow or cut. That is true, in the sense that redeeming the bonds draws on the government's general finances. But it is equally true of every Treasury bond held by a pension fund, a bank or a foreign government. The bonds are legal obligations backed by the full faith and credit of the United States. They represent money that workers actually paid in over many years, above what was needed for benefits at the time, and the government is obliged to repay it.

Why the reserves are running down

Starting around 2010, Social Security's costs began exceeding its income from payroll taxes, and since 2021 they have exceeded its total income including interest. The programme has been drawing down its reserves to cover the difference. Several forces explain why.

The largest is demographic. The baby boom generation, born roughly between 1946 and 1964, has been retiring in large numbers, so the number of beneficiaries is rising faster than the number of workers. Americans are also living longer, which is good news for them and expensive for any pension system. And birth rates have fallen, which means fewer future workers.

A second force is less discussed and matters a great deal to anyone who cares about inequality. When the system was last overhauled in 1983, about 90 percent of all wages in covered jobs fell below the taxable maximum. Since then, earnings at the top have grown much faster than earnings for everyone else, and more and more of the country's total wages sit above the cap where they are not taxed. The share of covered earnings that is taxable has fallen, by most estimates, to the low 80s in percentage terms. That means the payroll tax is catching a smaller slice of the economy than it was designed to.

What happens if Congress does nothing

This is where the coverage often goes wrong. If the reserves run out, Social Security does not stop paying benefits. Payroll taxes will keep coming in from every worker's paycheck. The problem is that under current law, the programme can pay out only what it takes in once the reserves are gone. In the 2025 report, the trustees projected that continuing income would cover about 81 percent of scheduled benefits in the combined funds after 2034, and about 77 percent of retirement benefits after the retirement fund's 2033 date.

That would still be a large and sudden cut, roughly one-fifth for every retiree, survivor and disabled worker at once. For the many older Americans who rely on Social Security for most of their income, that would be a disaster. But it is not the same as the programme going bankrupt or disappearing, and anyone who tells a young worker that they will never see a dime from Social Security is wrong about the law and the numbers.

The real menu of choices

The trustees describe the gap over the next 75 years in terms of what it would take to close it. There are only a few basic levers, and every serious plan is some combination of them.

More revenue. Congress could raise the 12.4 percent rate, apply the tax to some or all earnings above the cap, tax investment income or other forms of income for Social Security, or move money from general revenue. Raising or removing the cap is the option most favoured by progressives, and polls have long found it popular across party lines. Raising the rate on everyone spreads the burden more widely, including onto low-wage workers.

Smaller benefits. Congress could raise the full retirement age beyond 67, change the benefit formula so that future benefits grow more slowly, reduce benefits for higher earners, or switch the cost-of-living adjustment to a measure of inflation that tends to rise more slowly, often called the chained CPI. Raising the retirement age is a benefit cut, whatever it is called, and it falls hardest on people in physical jobs and those with shorter life expectancies, who are disproportionately lower-income.

New approaches. Some proposals would invest part of the reserves in stocks rather than only Treasury securities, as many state pension funds and other countries' systems do. Senators Bill Cassidy, a Republican, and Tim Kaine, a Democrat, have discussed a plan along these lines, built around a separate investment fund. Critics on the left worry it would expose benefits to market risk; critics on the right worry about government holding large stakes in private companies.

Each option is scored by the Social Security Administration's Office of the Chief Actuary, a non-partisan office that tells Congress how much of the gap a given proposal closes. That office's estimates are the closest thing the debate has to a referee.

Why the 1983 deal is the model everyone cites

The last time Social Security faced a near-term shortfall, in the early 1980s, the reserves were weeks or months from running dry. Ronald Reagan and House Speaker Tip O'Neill, who agreed on very little, accepted the work of a bipartisan commission chaired by Alan Greenspan. The resulting law, signed in April 1983, mixed revenue and benefit changes. It sped up scheduled payroll tax increases, began taxing part of benefits for higher-income retirees, brought newly hired federal employees into the system, and gradually raised the full retirement age from 65 to 67 for people born in 1960 or later.

Those changes built up the large reserves that are being drawn down now. The deal is often held up as proof that the two parties can compromise on Social Security. It also shows the cost of the compromise: the retirement age increase was a real benefit cut, and people born in 1960, who reach the new full retirement age of 67 in 2027, are the first to carry its full weight.

What I think the fair choice is

This section is argument, labelled as such. I think the fairest way to close most of the gap is to bring back the payroll tax on high earnings that the cap now lets escape, and to look for other revenue before cutting benefits.

The case rests on the cause of the problem. Part of the shortfall exists because the share of wages escaping the tax has grown as earnings at the top have pulled away from everyone else's. Asking the workers whose earnings have grown fastest to pay the same rate on all of their wages that a nurse or a truck driver pays on all of theirs is not a radical idea. It restores the balance the 1983 Congress expected.

The best case against it is serious. Removing the cap without raising benefits for those high earners would weaken the link between what people pay and what they get, which some fear would turn Social Security into a more welfare-like programme and erode its broad support. Others argue that it is a large tax increase on a group that already pays a big share of federal income taxes. Those are fair points, and a well-designed reform can address them, for example by giving some additional benefit credit for earnings above the old cap, or by phasing in the change.

What I do not think is fair is to close the gap mainly by cutting benefits for people whose earnings did not grow, who have fewer years to live, and who depend on Social Security for most of what they have.

The disability fund, and a warning about projections

The disability fund tends to get lost in coverage of Social Security's finances, and it holds a useful lesson. In the early 2010s, the trustees projected that the Disability Insurance fund would run out of reserves in 2016. Congress acted late: the Bipartisan Budget Act of 2015 temporarily shifted a slice of the payroll tax from the retirement fund to the disability fund. Then something the projections had not anticipated happened. Applications for disability benefits fell substantially over the following years, for reasons researchers still debate, including a strong job market. In its 2025 report, the trustees no longer projected the disability fund running out at all within the 75-year window.

That is a reminder about what a trustees' report is. It is a projection built on assumptions about birth rates, immigration, wage growth, interest rates, how long people live and how many become disabled. Change the assumptions and the date moves. The report itself acknowledges this by publishing intermediate, low-cost and high-cost scenarios, and the headline dates come from the intermediate one.

None of this means the shortfall in the retirement fund is imaginary. Its main driver, the ageing of the population, is well understood and very unlikely to reverse. But it does mean that anyone presenting a single year as a fixed deadline is offering more precision than the numbers carry, and that changes in the economy, including higher wages for ordinary workers, would improve the outlook.

What you can do

• Tell your members of Congress where you stand. The choices above will not be made by the trustees; they will be made in Congress, and the new majority will face them. Look up your representative and senators for their phone numbers and latest votes.
• Watch how Democrats line up. The party-unity page shows how often each Democrat votes with the party, which is useful when a Social Security vote comes and you want to know who held together.
• Keep the inequality behind the numbers in view. The inequality page charts the wealth shares of the top 1 percent and the bottom 50 percent and real wages over time, which is the backdrop to the shrinking share of earnings under the cap.
• Follow the debate as it develops. The topic page on inequality and taxing the rich gathers reporting on the payroll tax cap and other revenue proposals, so you can judge plans on their own terms when they come.