Your Social Security Isn’t Getting Cut, but a Quieter Threat Is Already Shrinking It

Millions of retired Americans today count on Social Security for income. And the idea of seeing those monthly checks shrink is unquestionably scary.

Unfortunately, the threat of Social Security cuts is very real. Current projections show that in the coming years, Social Security will owe more in scheduled benefits than it collects in revenue due largely to a shrinking labor force.

Social Security can tap its trust funds to keep up with benefit payments. But once that money runs out, broad benefit cuts may be inevitable.

The good news is that Social Security cuts are still a good number of years away. The earliest projections point to potential cuts in 2032, which means lawmakers still have time to prevent them from happening.

And to be clear, there’s a good chance Congress will step in and prevent broad benefits cuts, since they could otherwise spur a massive poverty crisis among older Americans. Plus, lawmakers have never allowed Social Security cuts to happen before despite the program’s finances being threatened in the past.

But even if Social Security doesn’t end up cutting benefits, that doesn’t mean those benefits are not under threat. There’s a quiet factor that’s hurting those benefits today and could get a lot worse over time.

Rising healthcare costs are creating a growing problem

Social Security benefits are designed to keep up with inflation in theory. Each year, they’re eligible for a cost-of-living adjustment, or COLA, that’s tied to inflation directly.

COLAs are based on third quarter changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. But there’s a problem with that formula.

Retirees commonly spend their money very differently than younger workers. Older Americans typically devote a much larger share of their budgets to healthcare, prescription drugs, insurance premiums, and out-of-pocket medical expenses. And these costs have historically risen faster than overall inflation.

As a result, even when Social Security recipients receive a COLA, it may not fully offset the higher expenses they actually face. This holds true even in years when COLAs are more generous.

For example, a retiree may receive a 2% or 3% increase in monthly benefits only to see Medicare premiums and prescription costs climb even faster. In practice, that means more of each Social Security check goes toward healthcare, leaving less money available for housing, groceries, transportation, and other essentials. The problem can compound as people age and their healthcare needs increase.

Some advocates have argued that Social Security should use an inflation index designed specifically for seniors to calculate COLAs. Critics, however, warn that such a change could increase long-term costs for Social Security at a time when the program already faces funding pressure.

Planning beyond Social Security

The growing gap between healthcare inflation and Social Security COLAs is one reason financial planners often stress that those benefits were never intended to be a retiree’s only source of income. For many Americans, building additional savings can provide flexibility when medical costs rise unexpectedly.

Planning for healthcare specifically is also important. Many retirees underestimate how much they might spend on future premiums and other out-of-pocket costs. Creating a dedicated healthcare cushion can help reduce financial stress later in life.

All told, Social Security is not disappearing, and benefit cuts are not even a given. But it’s important for future retirees to have income outside of Social Security. That’s because benefits may not be able to keep up with rising costs unless a major change comes down the pike.