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For millions of older Americans, Social Security is the foundation of retirement income. But a looming funding shortfall raises an uncomfortable question: Will retirees continue receiving all the benefits they’ve been promised?

According to a new analysis by Fidelity Investments, Social Security’s Old-Age and Survivors Insurance Trust Fund could exhaust its reserves in the fourth quarter of 2032. If Congress fails to act, incoming payroll taxes would cover only about 78% of scheduled benefits.

That could translate into an across-the-board benefit reduction of approximately 22%. For an average married couple receiving Social Security, Fidelity estimates the reduction could amount to $10,560 a year.

For retirees already struggling with rising housing costs, medical expenses, insurance premiums, and groceries, losing nearly $900 a month could be financially devastating.

However, Fidelity emphasizes that Social Security isn’t going bankrupt. Even if the trust fund reserves are exhausted, payroll taxes would continue supporting benefits. The challenge is that there wouldn’t be enough revenue to pay the full amount promised under current law.

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Three possible solutions

Congress has several options for addressing the shortfall, but nearly all involve politically difficult choices. Fidelity identifies three broad approaches.

1. Change Social Security benefits

One possibility is to gradually raise the full retirement age, currently 67 for Americans born in 1960 or later.

Some proposals would increase the age to 70 for certain workers, effectively requiring them to work longer to receive their full benefits.

Other proposals would change the formula used to calculate benefits, potentially reducing payments for higher-income retirees while preserving or increasing benefits for lower-income households.

For current retirees, one of the biggest concerns is whether Congress would reduce benefits they’re already receiving. Historically, lawmakers have tended to phase in major changes, giving people approaching retirement time to adjust. But future legislation could take a different approach.

2. Increase Social Security taxes

Instead of reducing benefits, Congress could require workers to contribute more to the system.

Currently, employees pay a 6.2% Social Security payroll tax, matched by employers. In 2026, only the first $184,500 in annual wages is subject to that tax.

One proposal would eliminate the earnings cap, requiring higher-income workers to pay Social Security taxes on all their wages.

Another would apply the tax to earnings above $250,000, while maintaining the existing wage cap for income below that threshold.

Lawmakers could also raise the payroll tax rate slightly for all workers.

These approaches could strengthen Social Security’s finances without directly cutting retirement benefits, although they would increase taxes for affected workers.

3. Expand the number of workers contributing

A third option would bring more workers into the Social Security system.

Fidelity notes that approximately 6.3 million state and local government employees don’t currently participate in Social Security because they are covered by separate retirement systems.

Requiring newly hired government employees to participate could generate additional revenue.

However, the financial benefit would be relatively small. Fidelity cites estimates suggesting that such a change would eliminate only about 4% of Social Security’s long-term funding shortfall.

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What a benefit cut could mean for your retirement savings

Fidelity’s analysis provides an example of how a Social Security reduction could affect retirees who depend on investment accounts to supplement their monthly benefits.

Consider a retired couple with $500,000 in savings and investments.

If their Social Security benefits were reduced by $10,560 annually, they would need to withdraw additional money from their portfolio to maintain their existing lifestyle.

Over 10 years, Fidelity estimates those extra withdrawals could total approximately $118,000.

When lost investment growth is included, the overall impact on the couple’s portfolio could reach approximately $161,000.

That’s a significant reduction in financial security, particularly for retirees who may need their savings to last another 20 or 30 years.

The example is hypothetical, and actual outcomes would depend on investment returns, inflation, and individual circumstances.

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What retirees and people nearing retirement should do

Although Congress has not settled on a solution, Fidelity suggests that Americans can take steps now to prepare for possible changes.

For people who haven’t started collecting Social Security, one strategy is to carefully consider when to claim benefits.

Claiming at age 62 results in a permanently reduced monthly benefit. Waiting until age 70, on the other hand, can increase monthly payments by approximately 24% compared with claiming at a full retirement age of 67.

However, delaying benefits isn’t always the best decision. Health, life expectancy, employment status, and other financial resources should all be considered.

People still working may also benefit from increasing contributions to retirement accounts, particularly if they qualify for catch-up contributions available to older workers.

For those already retired, reviewing spending and identifying expenses that could be reduced may provide an additional financial cushion.

Retirees might also consider whether their investments and other income sources are positioned to withstand a reduction in Social Security payments.

An important first step is to calculate how much of the household budget depends on Social Security and what adjustments would be necessary if benefits were reduced by 10% or 20%.

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Will Congress really allow benefits to be cut?

There is historical precedent for lawmakers reaching a compromise before Social Security runs into serious financial trouble.

In 1983, Congress approved a major overhaul of the program that included gradually raising the full retirement age, increasing taxes, and making other adjustments designed to strengthen its finances.

Those changes were implemented over time rather than imposed all at once. 

A similar bipartisan agreement could emerge before 2032, although the political challenges remain substantial.

It’s also important to distinguish between a projected funding shortfall and an actual benefit cut. The 22% reduction described by Fidelity is what could happen under current law if the retirement trust fund runs out of reserves and Congress takes no corrective action. It is not an announced reduction in benefits.