A 22% Social Security Benefit Cut Could Happen in Just 6 Years, and That's Just the Tip of the Iceberg
Key Points
Social Security's trust fund will be depleted in 2032.
A 22% cut may occur at this point, with further cuts to follow over the next 68 years.
The government will likely intervene to avoid benefit cuts, but it may need to raise taxes.
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Workers and Social Security beneficiaries got some scary news this week, courtesy of the latest Social Security Trustees' Report. While we've known for a while that the program's trust funds were running low, the latest report revealed that the insolvency deadline is closer than previously estimated.
The biggest stat from the report is that Social Security beneficiaries could face a 22% cut in 2032 if the government doesn't intervene. However, that actually undersells the scope of the problem.
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A 22% benefit cut wouldn't be the end of Social Security's troubles
Social Security is facing a benefit cut because it's not taking in enough money each year. This is largely due to changing demographics. The baby boomer generation increased the number of beneficiaries to levels never seen before, and the generations that followed them have been smaller, leaving fewer workers to pay Social Security payroll taxes.
The program can only pay out full benefits right now by taking money from its trust funds, built up over previous decades. However, the trust funds are now just six years from depletion. When that happens, Social Security will only have income from payroll taxes and the benefit taxes some seniors pay. That can fund most of Social Security's obligations, but not all of them.
A 22% benefit cut would be necessary at the end of 2032 unless the government steps in. That's not the end of the troubles, though.
The Social Security Trustees' Report projects that the program would be able to pay out only 62% of scheduled benefits by 2100. So after the initial cut in 2032, benefits would gradually decrease by a further 16%. But this likely won't come to pass.
Why Social Security benefit cuts likely won't happen
The government knows Social Security is in danger of cuts, and this isn't the first time that's happened. The program faced similar problems in the 1980s, and Congress stepped in to keep benefits flowing on schedule. It'll probably do the same thing this time.
The trouble is, keeping Social Security solvent will mean increasing the program's revenue, and that will likely involve higher taxes. We don't know exactly what this will look like yet, but we probably won't have to wait much longer to find out.
When the government does announce a plan to fix Social Security, everyone will need to take another look at their retirement plans. You may need to adjust your spending, remain in the workforce longer than expected, or rely more upon other income sources in retirement to keep yourself financially secure over the coming decades.
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