Social Security Benefit Cuts Have a Less Obvious but Very Scary Consequence

The Social Security Trustees have been sounding warnings for years about the program's rocky finances. And their 2026 update was not exactly a positive one.

In June, the Trustees reported that Social Security's Old-Age and Survivors Insurance (OASI) Trust Fund is expected to be depleted in late 2032. Social Security can still pay benefits once the OASI Trust Fund is empty, since the program is mostly funded by payroll taxes. But at that point, the program will be able to keep up with only 78% of scheduled benefits.

Image source: Getty Images.

A 22% Social Security cut is bad enough in its own right. But there's a less obvious consequence seniors might suffer if benefits are reduced broadly.

Smaller benefits would also mean smaller COLAs

Social Security's annual cost-of-living adjustments, or COLAs, are a lifeline for retirees. Without them, beneficiaries would be pretty much guaranteed to see their buying power diminished over time.

But if Social Security benefits are reduced in 2032 or at any point in time, it won't just mean smaller monthly checks for retirees. It could also mean smaller COLAs -- not percentage-wise, since that's based on inflation, but dollar-wise.

The average monthly Social Security benefit today is $2,083. If a check that size gets a 3% COLA, it amounts to a raise of $62.49.

But if that average check is reduced by 22%, it means it will be worth only about $1,625. And in that case, a 3% COLA amounts to an extra $48.74.

The difference between $62.49 and $48.74 might seem negligible. And the bigger issue, of course, is the smaller Social Security checks themselves. The point, though, is that benefit cuts could sting on multiple levels. And that's something retirees should be aware of.

How likely are Social Security cuts?

Social Security has faced financial challenges before. And lawmakers have never allowed the program to cut benefits. There's therefore a good chance Congress will manage to bail Social Security out this time around, too.

But that's not a given. And a lot of the solutions available to prevent Social Security cuts could have pretty lousy consequences.

Common solutions include raising the payroll tax rate (which would burden workers and companies with higher taxes), pushing back full retirement age (which would force people to work longer or accept reduced benefits), and lifting the wage cap (which introduces complications since that cap is tied to the program's maximum monthly benefit).

Since these fixes aren't simple by any means, it's important for retirees to brace for potential benefit cuts and prepare for them. That could mean reducing spending, pursuing part-time work, and taking other steps to shore up their finances prior to 2032 -- just in case.

The Motley Fool has a disclosure policy.