The 2032 blind spot: Many Americans don't know a 22% Social Security cut is looming
More than one in five Americans have no idea that their monthly Social Security checks could be slashed by roughly 20% in six years.
Social Security’s reserves could run out at the end of 2032, according to the 2026 Social Security and Medicare Trustees’ annual report. At that point, if no adjustments are made, the entitlement program’s Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay out only around 80% of benefits to seniors.
“Many Americans plan around Social Security as a reliable, steady source of income in retirement,” said Tim Pitney, the head of lifetime income distribution at TIAA, which surveyed US adults on the state of the entitlement program.
“But when a benefit cut arrives without awareness or warning, workers who have spent years relying on Social Security as the foundation of their retirement will have fewer savings to fall back on, and far less time to rebuild them.”
Read more: Retirement planning by age: The complete guide for your 20s-70s
How Social Security works
Social Security benefits are funded through payroll taxes, which are then invested in trust funds and paid out in monthly checks to millions of retirees and Americans with disabilities.
The tax only applies to earnings up to a yearly cap. The maximum amount of earnings subject to the Social Security tax in 2027 will jump to $192,300, up from $184,500 this year.
Workers and their employers each pay 6.2% on wages up to that amount. If you’re self-employed, you pay the entire 12.4% payroll tax.
Social Security currently provides monthly benefits to around 71 million Americans and provides the majority of income for 43% of seniors, according to AARP.
Read more: How much do you really need to save for retirement?
Proposals to fix
The depletion of Social Security’s trust fund has been decades in the making.
It’s “one of the most predictable events in public policy,” said Shai Akabas, vice president of economic policy at the Bipartisan Policy Center. “What’s different now is that this serious economic shock of a 22% across-the-board benefit cut has started coming into clear focus.”
Raising or eliminating the payroll tax cap has been a thorny topic in Washington in the search for a solution.
“Closing the gap would require raising revenue (a higher payroll tax rate or taxable wage cap), reducing benefits (a later retirement age or slower cost-of-living adjustments) or a combination of both,” Torsten Sløk, chief economist at Apollo Global Management, recently wrote. (Disclosure: Yahoo is a portfolio company of funds managed by affiliates of Apollo Global Management.) There has even been a proposal to have the Social Security administration borrow heavily and invest the leveraged funds in the stock market.
Congress has only two options to address the projected shortfall: “Bring more money into Social Security, or cut benefits,” Nancy Altman, president of Social Security Works, a nonprofit advocacy organization, previously told Yahoo Finance.
“Social Security’s future is on the ballot this November,” Altman said. “Anybody elected to the Senate will be in office, likely voting on that legislation to reform Social Security.”
‘Not enough to cover the gaps’
Once people are aware of the looming Social Security shortfall, more than 2 in 10 expect they’ll need to rely more on personal savings, increase their workplace retirement plan contributions, and contribute more to an individual retirement account (IRA), according to the TIAA data.
“This is an encouraging movement, but it’s still not enough to cover the gaps a lack of Social Security benefits could bring,” Pitney said.
In the past year, nearly half of Americans have paused saving for retirement to cover daily expenses, and only 7% have increased retirement contributions, TIAA found.
Meanwhile, half of Americans say keeping up with daily living expenses is a top financial priority, far outpacing those who report that saving for retirement is their primary concern.
“When presented with information about Social Security’s trust fund depletion, Americans understand the urgency and rank Social Security reform as the third most pressing option for lawmakers to address, after bringing down the high cost of living and healthcare costs,” Jim Johnson, global head of government relations and public policy at TIAA said.
They understand the need to save and are looking for ways to ensure they have a secure financial path through retirement, he added.
“The bottom line is that a possible 22% benefit cut makes it more important for households to save more and build a stream of income in retirement,” Apollo’s Sløk said.
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.”
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