How to close a $509,000 Social Security retirement gap

Social Security's retirement trust fund is projected to run dry in 2032, threatening automatic benefit cuts of up to 22 percent.

Social Security's retirement trust fund is projected to run dry in 2032, and if Congress fails to act, a high-earning 54-year-old couple could lose up to $509,000 in lifetime benefits, according to HealthView Services.

The report models several possible outcomes to help preretirees plan around the uncertainty. If Congress does nothing, current and future recipients would see automatic benefit cuts, with an average 54-year-old couple losing up to $194,500 in lifetime benefits and a high-earning couple losing up to $509,000, HealthView Services found.

To shore up the trust fund, lawmakers can raise taxes or reduce benefits, and the shortfall is large enough that Congress will likely have to do both while sparing current recipients. One option under consideration is raising the full retirement age to 68 from 67, which would cost an average couple $72,287 and a high-earning couple $252,522 in lifetime benefits, the report found.

For preretirees, the uncertainty argues for boosting savings now. A one-time investment today of $52,854 would make up for automatic benefit cuts for an average-earning 54-year-old couple who wait until age 70 to claim, while $123,873 would close the gap for a maximum-earning couple, assuming 6 percent annualized returns, according to HealthView.

Automatic cuts could reach 22 percent

Under current law, Social Security can only pay benefits from dedicated funding sources, including payroll taxes and the trust fund's reserves. If the reserves run out in 2032, benefits would be limited to payroll taxes, which aren't enough to cover full payments. The 2026 trustees' report forecasts automatic cuts of 22 percent if the retirement trust fund runs dry in 2032, and 17 percent for the depletion of the combined retirement and disability trust funds in 2034.

Most experts expect Congress to act eventually, since no politician wants to see seniors' income slashed on their watch. Lawmakers could exempt everyone from changes within 15 or 20 years of retirement, as they did in 1983, when reforms very gradually raised the full retirement age to 67 from 65. Workers born in 1938, who were 45 years old at the time, were the first group affected.

Closing the gap with a one-time investment

If Congress raises the full retirement age by one year, a $21,392 investment today would make up the difference for an average-earning couple, while $75,628 would close the shortfall for a high-earning couple, HealthView calculated. These hypothetical 54-year-old couples would first be eligible for benefits in 2034 at age 62.

Where to put the additional savings depends on age, but a balanced fund such as Vanguard Balanced Index, which holds about 60 percent in stocks and 40 percent in bonds, has returned an annualized 9.5 percent over the past decade. Bear in mind that oversaving is possible if benefits aren't cut, and it's probably safe to assume that anyone under 45 will see changes to the benefit formula that give them less than their parents would have received with the same work history.

Many Americans expect to get nothing from Social Security, but that puts an undue burden on them to make up 100 percent of lost benefits. As long as workers continue to pay payroll taxes, revenue will continue to flow into the program and the majority of benefits will continue to be paid.

These projections come from the 2026 trustees' report and HealthView Services modeling; figures may change with the latest official announcements, so readers should verify against current Social Security Administration data before making planning decisions.

This article is for informational purposes only and does not constitute investment advice.