How Social Security Works
Social Security is a federal insurance program funded by payroll taxes. Workers and employers each pay 6.2 percent of wages (up to the taxable maximum, $176,100 in 2026) into the Social Security Trust Fund. Those contributions fund current retirees’ benefits, Social Security is a pay-as-you-go system, not a personal savings account. Current workers fund current retirees.
Benefits are calculated based on a worker’s 35 highest-earning years, indexed for inflation. The full retirement age is 67 for anyone born after 1960. Early retirement at 62 is available with reduced benefits. Delayed retirement up to age 70 earns increased benefits.
The Solvency Problem
Social Security’s trust funds are projected to be depleted by 2033, seven years from now, according to the 2025 Social Security Trustees Report. When the trust funds are depleted, the program can pay only what current payroll tax revenue covers: approximately 77 percent of scheduled benefits. That is an automatic benefit cut of 23 percent for every Social Security recipient, with no congressional action required.
The cause is demographic: the baby boom generation is retiring en masse, increasing the beneficiary population, while lower birth rates in subsequent generations produce fewer workers per retiree. The ratio of workers per Social Security beneficiary was 5.1 in 1960. It is 2.8 today and falling.
Conservative Reform Proposals
The conservative reform menu includes several options, none of them politically comfortable. Raising the retirement age, from 67 to 69 or 70, gradually over time is the most common proposal. This reflects increased life expectancy: the program was designed in 1935 when the average American lived to 61. Reducing benefits for higher-income retirees (means-testing) would direct more of the program’s resources to lower-income beneficiaries who depend on it most. Indexing initial benefits to prices rather than wages would slow benefit growth over time.
Personal accounts, allowing workers to invest a portion of their payroll taxes in market-based accounts, are a longer-range reform that conservatives argue would produce better retirement outcomes over time, though the transition costs are significant.
Frequently Asked Questions
When will Social Security run out of money?
The Social Security Trust Fund is projected to be depleted by 2033. At that point, without reform, benefits would be automatically cut to 77 percent of scheduled amounts.
How is Social Security funded?
Social Security is funded by a 6.2 percent payroll tax on employees and employers each. The revenue funds current benefits in a pay-as-you-go system.
What are the main conservative Social Security reform proposals?
Gradual retirement age increases, means-testing for higher-income retirees, price indexing for benefit growth, and personal investment accounts are the main conservative reform proposals.
