Summary and Key Points: In February 2023, the Congressional Budget Office (CBO) warned that Social Security funds are projected to start running a shortfall in 2032, a year earlier than previously expected.

-This change is attributed to a large cost-of-living adjustment (COLA) due to high inflation. Despite concerns, Social Security will not run out of money, though benefits may be reduced by 20% if no legislative changes are made.

-Social Security is funded through payroll taxes, and while its reserve funds may be depleted, the program will continue to provide benefits, albeit potentially reduced, to retirees.

Social Security Shortfall Predicted to Start in 2032: What You Need to Know

In February 2023, the Congressional Budget Office (CBO) warned that Social Security funds are set to start running a shortfall in 2032, a year earlier than previously expected.

"The Social Security solvency date ­ the exhaustion date for the trust fund ­ is now within the budget window," CBO Director Phillip Swagel told reporters at the time, and warned that if the funds become insolvent, and without changes to current laws, beneficiaries would likely see upwards of a 20 percent reduction in benefits.

What is especially alarming about this prediction is that it was just in December 2022 that the CBO announced that the reduction could begin in 2033. However, the large cost-of-living adjustment (COLA) also announced around the same changed the projection. Moreover, in October 2022 – due to the record high inflation at the time – the Social Security Administration issued an 8.7 percent increase, the largest COLA hike in 40 years due to the country's out-of-control inflation.

Upwards of 66 million people receive benefits, with the average coming in around $1,691 according to January 2023 data from the Social Security Administration (SSA).

Given that so most consider it more than just "mad money" – and actually count on it to live – it is hard to suggest it shouldn't exist. Moreover, despite the warnings that it will face a shortfall, Social Security isn't going away.

Will It Run Out of Money? A BIG NO

A common refrain – arguably also a misconception – about Social Security is that it is a giant Ponzi scheme and will collapse just like one. That's not accurate to say the least, even as Social Security is likely going to reach a point where it will pay out more than it can take in.

At issue is that people are living longer and there are simply fewer young people, and not all of them are even in the workforce. Add that together and we're facing the largest number of retirees in the history of our nation. That simply means more will draw money from it than put in.

Though its reserve funds will be depleted, the majority of its benefits will still be covered by taxpayers.

In addition, even if Congress is unable to adjust the structure of the program by 2035 – including via tax increases, benefit reductions, or another method – Social Security will be able to continue providing benefits to elderly Americans just as it has done for decades.

How It Works?

Social Security is financed through a dedicated payroll tax, where employers and employees each pay 6.2 percent of wages up to the taxable maximum of $160,200 (in 2023), while the self-employed pay 12.4 percent.

"Total income, including interest, to the combined OASI and DI Trust Funds amounted to $1.222 trillion in 2022. ($1.107 trillion from net payroll tax contributions, $49 billion from taxation of benefits, and $66 billion in interest)," the Social Security Administration explained. "The payroll tax rates are set by law, and for OASI and DI, apply to earnings up to a certain amount. This amount, called the contribution and benefit base, or taxable maximum, rises as average wages increase."

As long as Americans keep working and paying their taxes, Social Security will be funded.

It Simply Means "Less Money," Not "No Money!"

As noted, currently 66 million receive benefits and that number is likely to increase in the coming decade as Generation X begins to reach their early 60s when they can begin to draw from the program. The key point is that in the worst-case scenario – if absolutely nothing is done – Social Security may have to reduce payments by as much as 20 percent as early as 2032.

Those cuts could see the payments reduced to $1,352 – which would essentially wipe out the cost of living adjustments (COLAs) that have bumped up the payments in recent years to keep track with inflation. That is bad news for the huge majority – 88 percent – of Americans who have said that they are counting on Social Security to see them through retirement.

Yet, again, the key point is that Americans who are set to receive the benefits will still get something. It just won't be as much as initially touted. In other words, as those of Generation X reach the age of retirement there will simply be a little less for them.

But GenX has always been resilient. It could mean working a few years longer, doing more with a little less, and perhaps starting to think about retirement right now. It could be the Millennials that may have it even worse, as they've been the ones to struggle with student loans and higher housing costs.

And finally, this is a problem if absolutely nothing is done. Social Security benefits are sure to be a campaign issue in 2024, 2026, 2028, and beyond. Lawmakers always listen to angry seniors – and we can only imagine the wrath of GenX when it hits its "golden years."

Author Experience and Expertise: Peter Suciu

Peter Suciu is a Michigan-based writer. He has contributed to more than four dozen magazines, newspapers, and websites with over 3,200 published pieces over a twenty-year career in journalism. He regularly writes about military hardware, firearms history, cybersecurity, politics, and international affairs. Peter is also a Contributing Writer for Forbes and Clearance Jobs. You can follow him on Twitter: @PeterSuciu. You can email the author: [email protected].

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