The U.S. has updated its Social Security estimates. Here’s what you need to know.

The U.S. has updated its Social Security estimates. Here’s what you need to know.

A government report Monday released fresh estimates of the budget outlook for Social Security, which provides critical benefits for retirees, workers’ survivors and some people with disabilities. The report warned of automatic benefit cuts starting in 2033 because the program is paying out more than it takes in, which will eventually exhaust its trust fund.

The report offered a more optimistic forecast regarding Medicare, the federal health insurance program for Americans 65 and older and those with disabilities.

Here’s what you need to know about how Social Security works, what steps could bring it to solvency, and how to prepare for potential benefit cuts.

What is Social Security?

Social Security is a social-welfare program that President Franklin D. Roosevelt established in 1935 as part of the New Deal. Originally designed and still functioning as a retirement safety net, it has significantly expanded over the years.

In 1939, Social Security added a survivors benefit program, followed by disability insurance in 1956. In 1965, Medicare was created as a national health insurance plan for the elderly, followed by Supplemental Security Income in 1972 to aid the blind and disabled children and adults.

Today, about 20 percent of Americans are receiving some kind of Social Security benefit.

How is Social Security financed?

Funding comes from a dedicated payroll tax paid by employers and employees, with each side kicking in 6.2 percent of gross wages up to a certain threshold, currently $168,600 per year. Any wages exceeding that amount are exempt from Social Security taxation.

Medicare collects an additional 1.45 percent of gross wages, bringing total deductions to 7.65 percent per worker.

These contributions are mandated by the Federal Insurance Contributions Act, which shows up on your pay stub as FICA. Self-employed individuals, meanwhile, are responsible for paying their share as well as the half that the employer would otherwise pay, which means they must fork over 15.3 percent from their income.

What is new in the 2024 Social Security and Medicare report?

Rosy economic conditions brought some good news for Medicare beneficiaries in Monday’s report, while the outlook for Social Security was largely unchanged.

The trustees of Social Security and Medicare — who include the Cabinet secretaries of labor, health and human services, and the Treasury, as well as the Social Security commissioner — said Monday that their forecast for the Social Security trust fund was mostly the same as last year: It will run out in 2033, at which point retirees will see their benefits cut by 21 percent. (The disability trust fund, which is separate, will be able to cover benefits through 2098, one year later than in last year’s report. If the two funds were to be combined, the expiration date would be pushed to 2035.)

But the trustees upgraded their outlook for the trust fund that pays for Medicare hospital benefits, projecting that it has enough money to cover full benefits until 2036, five years longer than forecast last year. After that, hospital coverage would be cut by 11 percent.

The revised forecast rests mostly on good economic news over the past year. Growth has been robust and employment rates have been high, meaning more people are paying taxes into the trust fund. The Medicare hospital fund also spent less in 2023 than the trustees had expected. On the other hand, certain demographic conditions still weigh on the programs in the long run, including low birthrates.

What happens when the Social Security Trust Fund runs out?

For decades, the government has forecast that the Social Security Trust Fund will eventually become insolvent: With the aging of baby boomers, there are more retirees relative to workers paying Social Security taxes.

But zeroing in on the actual numbers is challenging, because the estimate has to account for variables such as the size of the economy, tax revenue, birthrates and immigration.

The deficit between what’s expected to be collected versus what’s being paid out is about 3.5 percent, according to the 2024 report. Possible solutions for closing that financing gap include the politically treacherous choices of raising the payroll tax, cutting benefits, a combination of those two, or taking on more public debt to prop up the system.

If policymakers opted to hike taxes to keep the fund solvent for next 75 years, revenue would have to increase by raising the payroll tax rate by 3.44 percentage points, up to 15.84 percent. Employees would see their share go from 6.2 to 7.92 percent. If they chose the second scenario, they would have to cut benefits by 21.3 percent.

How can I maximize my Social Security benefits?

The simple answer is don’t start taking benefits until you turn 70.

To qualify for benefits in the first place, you need to work for 10 years, which earns you 40 “credits” with Social Security. The more you work beyond that, the greater the benefits will be — until you have worked for 35 years, at which point you’ll max out on what you get back.

You become eligible to receive benefits at 62, but those checks will be smaller than what you would get if you waited until what the government defines as “full retirement,” which falls between 66 and 67, depending on the year you were born. The monthly check that you get once you hit that milestone is an indexed benefit that the Social Security Administration calculates through adjusting your eligible earnings by averaging out the fat and lean years.

Once you hit 70, you can’t move the index any higher, even if you keep on working. To get a reading on where you are on the curve, log in to the system and have a look.

You can also keep working while cashing your Social Security checks — but remember that the government will take a slice off the top. If you start taking benefits before reaching full retirement age of 66 or 67, the government will deduct $1 from your benefits for every $2 you earn above the annual limit. For 2024, that limit is $22,320.

At the start of the year that you hit your full retirement age, that deduction will be $1 for every $3 earned over a higher limit — $59,520. But once you reach your birthday and qualify for full retirement, your earnings won’t cut your benefit amount.

Do I get back from Social Security what I put in?

It depends — and it’s complicated. The answer is determined by marital status, how long you paid in, how much money you made, interest rates and inflation.

Broadly speaking, the less you earn over your lifetime, the more you will get back relative to your contributions, while high earners will receive less compared to what they put in. That reflects the vision of Social Security’s framers, who sought a safety net to keep the nonworking elderly from slipping into poverty.