A new report has found that Social Security benefits could be cut by 28 percent in the coming years if no solution to a long-standing funding issue is found.
The Congressional Budget Office now estimates that the Social Security retirement trust fund will run out of money in fiscal year 2032, which is one year sooner than it previously projected.
If that happens under current law, the program will no longer be able to pay full benefits. Instead, payments would be limited to what is collected from ongoing revenue, mainly payroll taxes and taxes on benefits.
Why It Matters
Social Security forms the backbone of retirement for tens of millions of Americans, with the Social Security Administration (SSA) distributing monthly checks to more than 70 million people.
What To Know
According to the CBO, this shortfall would trigger an immediate cut of about 7 percent for all beneficiaries in 2032. From 2033 through 2036, average benefit reductions would deepen to about 28 percent each year.
The CBO said such a dramatic cut would have significant impacts on the wider economy. People would spend less, which would slow the economy, raise unemployment and ease inflation. The CBO believed the Federal Reserve would respond by lowering interest rates to support growth.
Lower rates would help offset some of the drop in spending, while benefit cuts would likely lead people to save more and stay in the workforce longer. Overall, the CBO estimates that in 2033—after the trust fund runs out—real GDP would be about 0.7 percent lower than projected, though output would be higher than expected in later years.
Interest rates would also fall. The CBO estimated that the yield on 10-year Treasury notes would be about 0.4 percentage points lower in 2033.
Social Security’s Shortfall
Forecasts for depleted Social Security funds aren’t new, with analysts long predicting a future shortfall. And a projection by a financial model isn’t a guarantee that benefits will be cut in the 2030s. But the looming problem isn’t going away without action from lawmakers in Congress.
Lawmakers from both sides of the aisle have proposed solutions to the potential shortfall. The Fair Share Act, introduced by Democrats Senator Sheldon Whitehouse of Rhode Island and Representative Brendan Boyle of Pennsylvania, would strengthen Social Security and Medicare by requiring people earning over $400,000 to pay payroll taxes on all income above that level. Supporters say it could fund the program for 75 years, though high earners oppose it.
A bipartisan proposal from Republican Senator Bill Cassidy of Louisiana and Democratic Senator Tim Kaine of Virginia would create a new investment fund, allowing Social Security to invest in stocks and other assets, starting with a $1.5 trillion Treasury-backed boost.
This is not the first time the SSA has faced a funding crisis. The program also came under severe financial pressure in the early 1980s, prompting major reforms.
In 1983, changes signed into law by President Ronald Reagan were designed to stabilize Social Security for decades. The Greenspan Commission on Social Security Reform was created to study the problem and recommend fixes, with the goal of extending the program’s solvency far into the future, initially projected to last until about 2060.
Those reforms included an increase in payroll taxes, requiring federal employees to begin paying into Social Security and gradually raising the full retirement age to 67.
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