A Big Social Security Update Happened Last Month, and It's Not Great News

Your Social Security benefits show up reliably every month, and they increase a little each year through annual cost-of-living adjustments (COLAs). But it's far from a perfect system.

Last month, a worrisome report revealed that the program's financial troubles are worse than previously thought. Seniors everywhere could face tighter retirement budgets as early as six years from now. But there's still time for this to change.

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What's happening with Social Security?

Social Security has been operating on borrowed time for quite a while. Its total expenses have exceeded its total income since 2021, and that's unsustainable. It's only been able to pay out all scheduled benefits over the last few years by drawing upon the trust fund reserves, but these won't last forever.

Estimates from past years suggested the trust funds had until 2033 or 2034 before they were depleted. But that's too optimistic, according to the latest Social Security Trustees' Report. It predicts that the trust funds will now be depleted by the fourth quarter of 2032, one quarter earlier than previously estimated.

Once those trust fund reserves are exhausted, the program will rely solely on payroll taxes on workers and benefit taxes on seniors to fund future benefits. That's enough to cover about 78% of Social Security checks in 2033, though this would gradually decline to 62% by the year 2100.

Without government intervention, all Social Security beneficiaries could see their checks slashed by 22% in 2033, forcing them to rely more heavily on personal savings or a job to cover their living expenses. But there's another more likely outcome.

There's still time to avoid benefit cuts

This isn't the first time Social Security has faced benefit cuts, and last time, the government made changes to the program to avoid this. It will likely do the same thing this time, but we don't know what the fix will look like or when it will take effect.

Congress may need to raise the Social Security payroll tax rate on workers, reducing their take-home pay. Or it might raise the full retirement age (FRA), which would act as an indirect benefit cut for younger workers. All options require someone to pay. But any fix is likely to be less damaging to seniors than a 22% cut.

We may have to wait a few more years to learn what's next for Social Security. Once Washington settles on a plan, everyone will need to rethink their retirement strategy to make sure they have a way to cover what Social Security won't.

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