Social Security set to run short of funds one year earlier than expected

Social Security funds are set to start running a shortfall in 2032, one year earlier than previously expected, the director of the Congressional Budget Office (CBO) said on Tuesday.

“The Social Security solvency date — the exhaustion date for the trust fund — is now within the budget window,” CBO Director Phillip Swagel said, referring to the 10-year period covered by the agency’s annual report.

If the Social Security funds become insolvent and there is no change to current laws, beneficiaries would see a more than 20 percent reduction in their benefits, Swagel added. 

This is the CBO’s second update to the Social Security insolvency date in the last two months, after it adjusted its projection down to 2033 in mid-December.

Swagel pointed to the large cost-of-living adjustment (COLA) announced last year for the change in its projection. The Social Security Administration issued an 8.7 percent increase in October, the largest COLA hike in 40 years, amid sky-high inflation.

High inflation can also lead to high wage growth, which may ultimately improve the solvency of the Social Security system, since it depends on taxing wages, Swagel noted. 

“There was high inflation, and that resulted in a high COLA, and then those benefits affect the solvency of the [Social Security] trust fund,” he said.

However, he added: “On net, it led to a deterioration in the system, and that moves our exhaustion date just forward one year but into the budget window.”

Swagel did not provide an update on the Medicare trust fund, which is expected to begin running a shortfall in 2028.