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

A government report due out later Monday will issue fresh estimates of the budget outlook for Social Security, which provides critical benefits for retirees, workers’ survivors and some people with disabilities. The report is expected to warn of automatic benefit cuts starting in the 2030s because the program is paying out more than it takes in, which will eventually exhaust its trust fund.

A similar warning is expected 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 social-welfare program that President Franklin Delano 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, around 20% of Americans are currently 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% of gross wages on income up to $168,600 per year. Any wages exceeding that amount are exempt from Social Security taxation.

Medicare collects an additional 1.45% of gross wages, bringing total deductions to 7.65% 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 15.30 % from their income.

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.

Each year, the Social Security Administration’s Board of Trustees issues a report on the condition of the trust fund. The 2023 report estimated that it will be depleted in 2034 – one year earlier than the 2022 prediction, due in part to the effects of the pandemic. The 2024 report is due out later on Monday.

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%, according to the 2023 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% age points, up to 15.84%. Employees would see their share go from 6.2 to 7.92%. If they chose the second scenario, they would have to cut benefits by 21.3%.

What do I get from Social Security?

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.