3 Things That Can Happen If Social Security Runs Short of Money
Social Security's trust fund is on track to hit a wall in 2032, and the fallout could reshape retirement for millions of Americans. The options on the table range from painful cuts to sweeping program reforms, and none of them…
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If you’ve been following the news, you may be aware that Social Security is facing a serious financial crisis. The program’s Old-Age and Survivors Insurance (OASI) Trust Fund is expected to run dry during the final quarter of 2032.
At that point, Social Security will still have revenue coming in from payroll taxes. But it won’t be enough to meet its financial obligations in full.
So what happens next? Here are three things that could happen.
1. Benefits could be reduced broadly
If Social Security’s OASI Trust Fund is exhausted, the program may have to reduce benefits across the board. The most recent estimate from the Social Security Trustees points to a 22% benefit cut. That would reduce the average monthly $2,084 retirement benefit to about $1,625.
Benefit cuts could be catastrophic for retirees who rely on Social Security for all or the majority of their income. And smaller benefits would also mean smaller cost-of-living adjustments (COLA) each year, thereby compounding the pain.
2. Congress could increase the program’s funding
If Social Security actually runs short on money, Congress could implement steps to increase the program’s funding. That could mean raising the payroll tax rate for all workers. It could also mean raising taxes on higher earners only by increasing or eliminating the wage cap, which limits the amount of income taxed for Social Security purposes each year.
Unfortunately, higher taxes could be a burden for working Americans, many of whom are already struggling financially. And if general payroll taxes are raised to help fund Social Security, companies will bear the brunt, too.
That could lead to a decline in workplace benefits if corporations seek to make up the money elsewhere. Worse yet, it could slow hiring, which would then actually be a setback for Social Security, since the program relies heavily on payroll tax revenue to stay afloat.
Of course, lawmakers could technically vote to use general federal revenue to support Social Security. But that’s an unlikely outcome given the current deficit. Plus, while that could potentially be a temporary solution, in the long run, it’s not sustainable, making it a less likely scenario.
3. Congress could change the way the program works
If lawmakers are not able to pump more money into Social Security, they may opt to change the way the program works. That could include gradually increasing full retirement age, which is when claimants are eligible to collect their monthly benefits in full. They could also implement means testing for higher earners and potentially reduce or eliminate benefits for retirees whose income exceeds a certain level.
Congress could also make changes to the benefit or COLA formula. There are many different options lawmakers can implement individually or jointly.
There’s a lot of uncertainty
All told, Social Security’s financial woes are real. But it’s unclear as to what the future holds exactly and what lawmakers will do about the looming problem at hand.
Benefit cuts aren’t a given, so current and future retirees may not see their payments cut. But serious reform will be needed to shore up Social Security’s finances and keep the program running smoothly for years to come.
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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.
