Social Security Can’t Go Bankrupt. But Benefits Could Still Be Cut 22% in 2032
Scary headlines about Social Security going broke are spreading fast, but the real threat to your retirement income is something most people are not prepared for.
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If you’ve been seeing headlines about Social Security potentially going bankrupt, it’s natural to feel concerned about your retirement income. But while Social Security is facing a big financial crisis, one thing’s for sure: the program is not about to go bankrupt.
In fact, the nature of how Social Security is funded means the program can’t go bankrupt. Here’s the truth about what’s actually happening with Social Security and what to expect.
Why Social Security can’t actually go bankrupt
Social Security is funded primarily through payroll taxes paid by workers and their employers. Granted, that’s not the only source of revenue for Social Security. When payroll taxes aren’t enough to cover scheduled retirement benefits, Social Security can draw from its Old-Age and Survivors Insurance (OASI) Trust Fund.
The challenge is that the OASI Trust Fund isn’t expected to last forever. Current projections show it becoming depleted in 2032 if Congress makes no changes.
Even then, Social Security should continue receiving payroll tax revenue every year. Those taxes are expected to be sufficient to pay roughly 78% of scheduled retirement and survivor benefits, making a 22% cut the worst-case scenario on the table right now.
Now to be fair, that’s a pretty dire situation for people who rely on Social Security benefits to make ends meet. But it’s also a very different reality than completely having benefits stop. The latter scenario is not on the table.
History suggests Congress is unlikely to do nothing
Although Social Security isn’t in great financial shape right now, it’s not the first time in the program’s history where the possibility of cuts has been floated. In the early 1980s, for example, lawmakers had to approve reforms that strengthened Social Security and extended its solvency.
Many retirement experts expect Congress to address the current funding shortfall as well, though it’s impossible to predict exactly when or what changes lawmakers will adopt. Possible solutions include raising payroll taxes, increasing the wage cap subject to Social Security taxes, gradually raising retirement age for younger workers, or combining several of these approaches.
How to prepare for potential Social Security cuts
While there’s a good chance Social Security won’t actually have to cut benefits, it’s important to prepare for that in case it happens. If you’re still working, increasing your retirement savings can reduce your dependence on Social Security later.
You should also avoid making claiming decisions based solely on fears about Social Security going bankrupt. Instead, come up with a strategy that allows you to maximize benefits.
If you’re already retired, review your budget to identify expenses that could be adjusted if necessary. And also, consider working part-time to build or boost savings. Having a financial cushion could make it easier to adapt if your benefits end up shrinking.
The bottom line
Despite the rumors, Social Security isn’t on the verge of bankruptcy. Even if the OASI Trust Fund is depleted in 2032, payroll taxes will continue funding most scheduled benefits.
While the possibility of a 22% reduction deserves attention in its own right, history suggests lawmakers are unlikely to allow such large automatic cuts to take effect without attempting to implement a fix. Preparing for different outcomes could help you protect your retirement regardless of what Congress ultimately decides.
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Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, and Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
