Social Security could cut benefits starting in 2032

If you’re planning to rely on Social Security in retirement, here’s the number that matters: 7%.

That’s the estimated benefit reduction the Congressional Budget Office (CBO) says would be required in fiscal 2032 if the Social Security Old-Age and Survivors Insurance trust fund is exhausted and lawmakers do nothing.

And the reductions would not stop there.

In an illustrative scenario, CBO estimates benefit cuts would average about 28% per year from 2033 through 2036 if payments were limited strictly to incoming payroll tax revenue.

Let’s translate that.

If your projected monthly benefit is $2,000, a 7% reduction would bring it down to about $1,860 in 2032. A 28% reduction would lower it to roughly $1,440.

That’s not a political talking point. It’s math.

Here’s how much Social Security payments could shrink, and when

CBO now projects the Social Security retirement trust fund will be exhausted in fiscal year 2032, one year earlier than previously forecast.

Under current law, once the trust fund’s balance reaches zero, the government would no longer have legal authority to pay full scheduled benefits. Payments would be limited to the amount coming in from dedicated revenue sources, primarily payroll taxes and income taxes on benefits.

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CBO’s official baseline assumes full scheduled benefits continue, as federal budget rules require. But in its “payable benefits” illustration, benefits would be aligned with annual revenue once reserves are depleted.

That alignment produces the 7% reduction in 2032 and significantly larger reductions thereafter.

The most recent report from the Social Security trustees projected depletion in 2033 and estimated that incoming revenue would cover about 77% of scheduled benefits at that point: different date, same structural issue.

Why Social Security is in danger

The driver is demographics.

The number of Americans age 65 and older is nearly three times what it was 50 years ago and is projected to rise another 15% over the next decade as baby boomers age and life expectancy increases.

More beneficiaries living longer means higher outlays. Social Security paid out $1.6 trillion last year. CBO projects annual outlays will reach $2.7 trillion by 2036.

At the same time, federal debt held by the public is projected to reach 120% of GDP by 2036, with rising Social Security and Medicare costs and growing interest payments adding pressure.

“Our budget projections continue to indicate that the fiscal trajectory is not sustainable,” CBO Director Phillip Swagel said.

Will Congress fix the Social Security problem?

History suggests lawmakers tend to act late.

The Social Security trustees’ projection is “not surprising at all given the current demographic trends and spending,” Jim Blankenship, a longtime Social Security analyst and financial planner with Blankenship Financial Planning, told TheStreet.

“Using history as our guide, I still don’t expect to see any substantive changes to the Social Security program before the last possible minute,” he said, referring to the early 1980s, when Congress acted only as reserves were nearly depleted.

Those reforms were phased in gradually and largely spared people already near retirement.

If that pattern holds, younger workers are more likely to feel structural changes than today’s retirees.

What you should do now to prepare for retirement

You cannot control when Congress acts. You can, however, control your assumptions.

1. Stress-test your retirement plan. Run projections assuming you receive 75% to 80% of your expected benefit. If your plan survives that scenario, you have flexibility. If it doesn’t, you have time to adjust.
2. Revisit your claiming strategy. Delaying benefits increases your monthly check and builds a larger inflation-adjusted base. That matters in uncertain policy environments.
3. Build margin into spending. The closer you are to retirement, the more important spending flexibility becomes.
4. Diversify income sources. Employer plans, IRAs, taxable accounts and part-time work reduce reliance on any one income stream.
5. Contact your elected representatives. Beneficiaries and future beneficiaries can write to members of the House and Senate urging them to address Social Security’s financing gap before solutions become more abrupt or disruptive. (Of note, the Committee for a Responsible Federal Budget has an application on its website, The Reformer, which allows users to build their own plan to restore solvency.)

As Mike Piper, author of “Social Security Made Simple,” noted, this problem is fixable. The size of the shortfall is known. The menu of policy options is well understood.

“One of the most frustrating aspects of the situation is how thoroughly fixable this problem is,” Piper told TheStreet. “We have a very good idea of the magnitude and timing of the shortfall. We know what the available options are. We have good data on how far each of those options will go toward fixing the problem.”

What remains uncertain is timing.

The prudent approach is simple: hope for a legislative fix. Plan as though benefits could be trimmed.

Related: How much will Social Security really pay you in retirement?