How Soon Will the Social Security Trust Fund Be Depleted and How Should People Protect Their Retirement Income?

The trust fund is likely to be empty in 2032, according to the Center for Retirement Research at Boston College. That estimate was made early in the pandemic and probably uses assumptions about the effects of the recession that will turn out to be optimistic.

The Penn Wharton Business Model staff did a couple of forecasts using different assumptions about the recession. The optimistic assumptions estimated the trust fund would run out of money in 2032. But the pessimistic assumptions estimated the trust fund would last only until 2030.

More recently, the Congressional Budget Office included an estimate about the trust fund in its annual federal government budget projections. The CBO pegged 2031 as the year the trust fund will expire.

Even after the trust fund is depleted, Social Security won’t run out of money. The program will continue to receive payroll taxes from employers and employees and self-employment taxes from owners of unincorporated businesses. These annual revenues are estimated to be enough to allow Social Security to pay about 76% of scheduled benefits for at least 75 years.

In the worst-case scenario, in which Congress doesn’t act, there would be an across-the-board reduction in benefits of about 24% after the trust fund is empty. Before that happens, I believe Congress is likely enact a combination of tax increases and benefit reductions that prevent an across-the-board benefit cut.

Based on past practices, I expect those already receiving retirement benefits and those within five to 10 years of claiming benefits will be protected from any benefit cuts, except those with higher incomes or net worths. Those already retired might see the amount of Social Security benefits subject to income taxes increase from the current maximum of 85% of benefits.

People who are near retirement shouldn’t adjust their claiming strategies in response to forecasts the trust fund will run out of money. As I explain in my book, Where’s My Money: Secrets to Getting the Most out of Your Social Security, waiting to claim benefits usually is the better strategy, unless you have good reason to believe you won’t live to at least average life expectancy. The benefits of waiting until at least full retirement age, and preferably until age 70, compound through retirement and provide higher lifetime benefits, often an increase of $100,000 or more for the average beneficiary.

In a married couple, the spouse with the higher-lifetime income should wait as long as possible to claim benefits. That’s because after one spouse passes away, only one benefit is paid to the surviving spouse. You should want it to be the highest benefit possible.

Some people recommend taking retirement benefits as soon as possible, believing that will insulate you from benefit cuts or allow you to receive as much money as possible before the cuts. But I believe Congress will protect people within five to 10 years of claiming benefits, except those with higher incomes. Even if that doesn’t happen, if benefits are to be cut it’s better to have them reduced from the higher benefit level promised by delaying benefits than from the lower level paid by claiming benefits early.

Future retirees and current retirees with high incomes or net worths should be prepared for a combination of tax increases and benefit reductions equal to about 25% of their currently-promised Social Security benefits.

We’ll receive the latest annual estimate from Social Security’s trustees in the spring of 2021. The report is likely to spur policy makers in Washington to begin serious work on shoring up the system, because the depletion of the retirement trust fund probably will be only 10 years in the future and may be sooner.