The Social Security trustees released their annual report on Monday, and the outlook is bleak.

Social Security has morphed far beyond its original intent, and absent congressional action, everyone who is of Generation X or younger will not receive a single full benefit, and even those already in retirement will experience significant benefit cuts.

To prevent benefit cuts for even the most elderly who rely on Social Security for their entire income, Congress will have to act.

Determining the best pathway for reform, however, requires understanding some crucial facts about Social Security.

Fact #1: Social Security’s retirement fund will run dry in nine years. The Social Security trustees project that the Old Age and Survivors Insurance, or retirement program, will be insolvent in 2033. At that point, Social Security benefits will be limited to the amount of Social Security payroll taxes that come into the program.

Technically, insolvency means that the notional trust fund (which currently consists of IOUs that the federal government issued to the Social Security trust fund when it borrowed payroll-tax revenues to fund non-Social Security spending) will have no more money—or IOUs—left to be reclaimed.

Fact #2: 21% automatic benefit cuts will ensue. Because Social Security is a self-financed program, it cannot spend more than it takes in. Consequently, unless Congress reforms Social Security, benefits will be reduced by 21% across the board beginning in 2033. That will equal a loss of about $4,600 for the average beneficiary, who receives about $22,000 per year from Social Security.

Beyond 2033, payroll taxes will cover a declining share of scheduled benefits, and benefit reductions will rise to 31% by 2098.

Fact #3: Social Security has $22.6 trillion in unfunded obligations. Social Security’s combined Old Age and Survivors Insurance and Disability Insurance programs have accumulated $22.6 trillion in unfunded obligations, which is effectively the additional amount required to maintain Social Security’s current benefit levels over the next 75 years. That amounts to $172,000 for every household in America.

Fact #4: Large tax hikes would be required to prevent benefit reductions. To prevent any benefit reductions, the Social Security trustees estimate that payroll taxes would have to rise immediately from 12.4% to 15.7%. That estimate may be too conservative, however. The Congressional Budget Office estimates that payroll taxes would have to rise immediately to 17.5% to maintain current benefits.

Those estimated tax hikes would add between $2,500 and $3,800 in annual Social Security taxes for a median household with about $75,000 of income. When Social Security was established, it started out as a 2% tax, and its founders promised the program would never take more than 6% of workers’ paychecks.

In addition to the basic facts presented in the trustees’ report, understanding some common misconceptions about Social Security can help Americans assess the best options for reform.

Misconception #1: Social Security is a retirement savings program. Today, not a single dollar of workers’ Social Security payroll taxes is saved. Decades ago, a significant portion of workers’ payroll taxes were designated to the Social Security trust fund and earned interest (because the money was lent to the federal government to finance deficits in other, non-Social Security government spending).

Since 2011, however, Social Security has paid out more in benefits than it has collected in tax revenues, and every dollar of workers’ payroll taxes has gone straight out the door to current retirees. Thus, Social Security is not a retirement savings program, but an intergenerational income-transfer program.   

Misconception #2: Social Security is a good deal. Social Security was a good deal for early generations of beneficiaries who received far more than they paid into the system.

Social Security continues to seem like a good deal to many people because a $2,000 monthly benefit check is very noticeable, whereas workers never see the 6.2% Social Security tax that employers pay on their behalf and with automatic deductions and direct deposit of paychecks, many workers don’t notice the 6.2% taken from those paychecks.

Moreover, most workers have no idea what they could have received if their payroll taxes had instead been put into a personal retirement account.

My colleagues and I at The Heritage Foundation estimated that the average worker could receive three times as much from a personal retirement account, compared to what Social Security provides. Even minimum-wage workers could receive 40% more from a personal retirement account. (The Heritage Foundation founded The Daily Signal in 2014.)

Misconception #3: Making everyone pay their “fair share” of Social Security taxes would fix the program’s shortfalls. To increase Social Security revenues, some lawmakers have called for subjecting all earnings (and potentially unearned income) to Social Security’s 12.4% tax. Currently, Social Security’s tax applies up to $168,600 of earnings in 2024. The current cap is already 2.5 times as large, in inflation-adjusted dollars, as the original earnings cap.

Social Security’s tax cap also functions as a benefit cap. Since benefits are a function of the income on which workers paid taxes, the tax cap prevents very wealthy individuals from receiving very large Social Security benefits.

Eliminating the Social Security tax cap entirely would only solve about half of Social Security’s shortfalls. Since eliminating Social Security’s tax cap would bring the top federal income tax rate to 51.8% and the top combined state and federal income tax rate to 65.8% (in 2026 and beyond), this would leave little room to raise taxes to cover the federal government’s regular deficits or Medicare’s more than $50 trillion in shortfalls.

As Brian Riedl of the Manhattan Institute noted, “even 100% tax rates on million-dollar earners would not come close to balancing the budget, and seizing all $4.5 trillion of billionaire wealth—every home, car, business, and investment—would merely fund the federal government one time for nine months.”

Social Security’s outlook is dismal, and the politics of reform are even worse. But the good news is that Social Security truly is solvable.

By slowly shifting to a system of universal benefits, modernizing outdated features, and adding an ownership option, policymakers can preserve Social Security, improve benefits for those who need them most, and increase all Americans’ lifetime incomes.