Over the past several years, Americans have grown more pessimistic about the state of Social Security. At GOBankingRates, we previously dove into when people thought they would be able to retire and what their benefits might look like.

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Nearly one-quarter (23%) of the respondents in a Clever Real Estate survey said they didn’t believe they could retire until they reached 80. The year before, over half (55%) of non-retired respondents said that they thought the Social Security program would run out before they could retire.

While attention-grabbing headlines may lead you to believe that the program will be bankrupt in the next 10 years, it is far from reality. What many people do not understand is that Social Security benefits are paid for through current workers’ payroll taxes.

Every month, workers contribute to Social Security. Benefits, however, are supplemented through a trust fund. It is the reserves, not the program itself, that are expected to be depleted by 2033 or 2034, according to the Social Security Administration (SSA). Without action by Congress, the SSA anticipates being able to pay approximately 80% of the level of benefits that are currently scheduled.

We asked True Tamplin, a financial expert and founder of Finance Strategists, to help us understand what this means and how it will affect future retirees.

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Why Do People Think Social Security Will Run Out?

True Tamplin (CEPF^®), the founder of Finance Strategists, said, “The anxiety around Social Security running dry by the time many Americans retire, a concern shared by over half of non-retired individuals, stems from the program’s intricate relationship with demographics and the economy.”

“At its core, Social Security operates on a pay-as-you-go system, funded by payroll taxes levied on current workers. These contributions flow into trust funds but don’t sit there gathering dust for individual future use. Instead, they’re immediately disbursed to current retirees and other beneficiaries,” he said.

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Why Are Reserves Expected To Run Out?

Americans need to understand why reserves might run out if nothing changes.

“The projected depletion of these reserves, currently estimated for 2034, arises from a couple of converging factors,” Tamplin said. “One is the demographic tide: the baby boomer generation is retiring in droves, swelling the ranks of beneficiaries while the workforce replenishing them is smaller due to lower birth rates.”

“This imbalance throws the system’s supply and demand out of whack. Additionally, wage growth hasn’t kept pace with rising living costs, particularly housing, squeezing disposable income and payroll tax contributions,” he said.

How Are Individual Benefits Calculated?

To determine the impact of the dwindling reserves, you’ll want to understand how your benefits are calculated.

Individual benefits are “calculated based on a complex formula factoring in your average lifetime earnings, age at claiming, and the current benefit index,” Tamplin said.

“Claiming early comes with a price tag — permanent reductions to your monthly payout. For every month before your full retirement age (FRA, which ranges from 66-67 depending on your birth year), your benefits shrink by 0.5%-0.6%.”

With this in mind, you’ll want to plan carefully — especially since waiting comes with a bonus.

“Conversely,” he said, “delaying your claim beyond FRA rewards you with 8% yearly increases for up to four years, effectively boosting your lifetime income. Your highest 35 years of earnings (adjusted for inflation) serve as the building blocks of your benefit calculation.”

“So, the higher your average indexed monthly earnings (AIME), the more substantial your checks will be. This puts those with longer, consistent, and well-paying careers at an advantage compared to those with shorter work histories or lower income trajectories. However, if the reserves run dry as projected, benefits across the board might face automatic cuts of around 23%,” he said.

Take Aways

The good news is that retirees can expect to continue to receive Social Security benefits well beyond the next decade, although those benefits may be reduced if Congress fails to take action. The reality is that the total cost of the program exceeds the amount of income that is received. If the cost of the program continues to exceed the income received, the program must rely on the reserves to pay benefits. Unless money is added to the reserves or the program is changed, the reserves will be depleted over time.

Looking to the Future

Some lawmakers have started pushing for reform. In May 2023, House Ways and Means Social Security Subcommittee Ranking Member John B. Larson (CT-01) announced legislation, Social Security 2100, to help protect the program.

According to a press release by his office, “Social Security 2100 will provide an across-the-board benefit increase for all recipients, ensure benefits better reflect seniors’ expenses, repeal the WEP/GPO that penalizes public servants, cut taxes for 23 million beneficiaries, and extend the solvency of the Social Security Trust Fund by asking Americans making more than $400,000 a year to finally pay their fair share.”

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This article originally appeared on GOBankingRates.com: Half of Americans Think Social Security Will Run Out — Here’s What They Don’t Understand