Social Security checks could shrink by $500 a month in 2032

A new analysis is putting a number on what could happen if U.S. lawmakers do not address Social Security’s financial problems. Starting in 2032, the average retiree could lose roughly $500 a month, thanks to the reduction of average monthly benefits checks.

Social Security has a trust fund that helps make up the difference when benefit payments exceed the money coming in from payroll taxes. For years, the system worked with more workers paying into it than retirees collecting from it. But as more Baby Boomers retire and Americans live longer, benefit obligations have grown faster than revenue. The result is a growing funding gap.

What happens if the trust fund runs out?

Per a new analysis from the Committee for a Responsible Federal Budget, the average retiree could see benefits reduced by about 24% if the trust fund becomes insolvent at the end of 2032. That works out to about $500 monthly.

Importantly, insolvency does not mean Social Security would stop sending checks altogether.

Payroll taxes would still be collected, allowing benefits to continue. The problem is that the system would only have enough incoming revenue to cover a reduced portion of promised benefits.

The projected cuts vary by state, with some states set to be hit harder than others. Some of the states with the largest projected cuts are are Connecticut ($556), New Jersey ($554), and New Hampshire ($553).

Congress still has time to act

The situation has retirees worried because of their reliance on Social Security checks. According to a survey from the Senior Citizens League, 73% of retirees depend on it for more than half of their income. 39% depend on it for all of their income.

For those households, a 24% reduction crosses from being a budgeting inconvenience to being a major financial shock. Housing, groceries, utilities, healthcare, and prescription costs have all climbed in recent years, making any potential reduction even more significant.

The key thing to understand is that these cuts are not locked in. They are a projection based on what happens if lawmakers take no action before the trust fund runs out.

Several proposals have been floated over the years, including raising or eliminating the income cap on Social Security payroll taxes, which currently exempts earnings above a certain threshold from additional Social Security taxes. Other proposals involve changing benefits, increasing revenue, or some combination of both.

The next big update is coming soon

The Social Security Administration is expected to release its annual Trustees Report in the coming weeks. That report will provide the latest estimate for when the program's trust funds could become depleted.

Until then, the issue is no longer a very distant future problem.

Source: CBS News