The Social Security Trust Fund Is Declining Faster Than You Expected. Here’s How to Plan for Every Age.
Funding for Social Security could end earlier than expected, according to the latest Congressional Budget Office (CBO).
Social Security’s main retirement account, the Old-Age and Survivors Insurance Trust Fund, could be depleted by 2032, a full year earlier than the agency estimated last year.
The benefits will not disappear even if the trust fund reserves reach zero. Workers will still pay into the program through payroll taxes, and that money will still go to beneficiaries.
But according to an analysis by the Center on Budget and Policy Priorities, the Social Security Administration (SSA) will only be able to pay about 81% of the promised benefits when the reserves are exhausted.
Why did the timeline change?
CBO’s revised projections come from revised economic forecasts that predict higher inflation in the coming years. That’s important because Social Security’s cost-of-living adjustment, or COLA, is directly related to inflation.
Higher COLAs mean larger benefit payments, which drain the trust fund faster. CBO projects a COLA of 3.1% for 2027, at the high end of expectations.
The agency also expects lower revenues from payroll taxes and income taxes on profits, further depressing revenue.
The SSA has been tapping into trust funds since 2021, when benefit costs begin to exceed revenue. An aging population seeking additional retirement benefits has created structural imbalances.
If you are already retired
Current retirees could be looking at a benefit reduction of around 19%. The smart move now is dividing your budget. Look at your monthly expenses and identify where you will cut back if your Social Security check is reduced by about a fifth.
Consider whether you can make more money. A part-time job, even a few hours a week, can provide a savings.
Review any other sources of income, including pensions, annuities or investment accounts. Understanding how much of your retirement depends on Social Security will help you gauge your exposure to possible cuts.
If retirement is 10 to 15 years away
You still have time to make meaningful changes to your retirement plan, but that window is shrinking.
Maximize your retirement savings contributions. If you’re 50 or older, you can make catch-up contributions to 401(k) plans and IRAs. Every extra dollar you put aside now is a dollar independent of congressional action.
Think carefully about when you will claim the benefits. If you can delay claiming Social Security, you’ll lock in a higher base that provides more protection even if cuts occur.
Finally, stress-test your retirement plan using conservative Social Security assumptions. Run the numbers assuming you’ll get about 80% of your projected profit. If your system still works under that condition, you’re in good shape.
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If you are decades away from retirement
Young workers probably shouldn’t count on getting full Social Security benefits. That’s just smart planning.
However, you have the advantage of time as your greatest asset. Start building private retirement savings now. The potential for compound growth over 20 or 30 years is huge. Prioritize tax-advantaged accounts such as 401(k)s and Roth IRAs.
Think of any profit at the end as a bonus rather than a base.
An important point
Congress has addressed Social Security’s funding shortfall before, and there’s still plenty of time for lawmakers to act. Possible solutions range from raising the income tax cap to adjusting benefit formulas to raising the retirement age. The political will to deal with this issue has historically been met when the deadline is near.
But don’t wait for Washington. A smart approach prepares a range of results. Take CBO’s new projections seriously and make changes under your control. Finally, remember that Social Security was always designed to be one part of your retirement savings.
