Why a Social Security Benefit Cut Is Worrying - and Why Some Fixes May Be Worse

Even if you have retirement savings, Social Security will probably remain a major part of your retirement income. The problem is that the program is heading toward serious financial strain in the years ahead.

The latest Trustees Report projects that the Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay full scheduled benefits only through the fourth quarter of 2032. After the trust fund is depleted, Social Security would still be able to send checks, but beneficiaries could face an estimated 22% reduction.

Lawmakers are considering ways to avoid that outcome, but some of the likely fixes could create new problems that are just as serious.

Congress has avoided benefit cuts before

Social Security’s financial trouble is not new. For years, the program’s Trustees have been warning that a shortfall is approaching.

There is at least some reason for optimism: Congress has never allowed Social Security benefits to be cut in the past, so it may be able to prevent reductions again.

Still, lawmakers often wait until the last possible moment to act. In 1983, Congress made changes to keep Social Security from cutting benefits only when insolvency was just months or weeks away.

One reason for the delay may be that the available options are difficult to carry out and politically unpopular. The choices being discussed could trigger strong backlash.

Increasing payroll taxes

Payroll taxes are Social Security’s main source of funding. For 2027, wages up to $192,300 are subject to the 12.4% Social Security tax, split equally between employers and employees. That wage cap is likely to rise in future years.

Raising the 12.4% tax rate could bring in more revenue for the program, but it would also increase the burden on workers.

That could make it harder for employees to save for their own retirement or build extra income beyond Social Security. It could also reduce consumer spending and slow the broader economy.

Businesses could feel the pressure too. Employers might scale back benefits such as 401(k) matches, health coverage, and wellness programs. If payroll costs rose too much, larger layoffs could follow.

Delaying full retirement age

Full retirement age, or FRA, is the age at which people can claim their monthly Social Security benefits without a reduction. For anyone born in or after 1960, that age is 67.

Increasing FRA to 68 or 69 could help keep more people working longer, which would mean more payroll taxes flowing into the program.

But requiring workers to wait longer for full benefits could come at a cost. Some people may lose the chance to enjoy more years in good health during retirement. Others may not be able to keep working past 67 because of health problems. Those workers could end up with reduced benefits and added financial stress later in life.

Means-testing benefits

Another possibility is means-testing Social Security so that higher-income retirees receive smaller checks or none at all. That would save money for the program.

However, means-testing can penalize people who spent decades saving carefully and investing wisely. Some retirees end up with large nest eggs not because they earned extremely high salaries or inherited wealth, but because they consistently saved and invested over 35 or 40 years.

Reducing or eliminating benefits for those people could seem unfair, and it would also change the program’s basic structure. Social Security has traditionally worked on the principle that higher contributions lead to higher benefits, up to a limit. A means-tested approach would make it resemble a welfare program more than it does now.

What it means

It is not certain that Social Security will have to cut benefits for retirees. But because the available solutions are so difficult, it is wise to prepare for that possibility anyway.

If retirement is approaching, it makes sense to strengthen other sources of fixed income in case Social Security is less dependable than expected. That could mean saving more while you are still working, planning to work part-time after leaving your career, or building investments that generate steady income so you rely less on monthly Social Security checks.

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