A new Fidelity Investments analysis warns that Social Security's retirement trust fund could face a shortfall in 2032, potentially reducing benefits by 22% unless Congress acts.
Lawmakers are considering three broad approaches to strengthen the program: changing benefits, raising payroll taxes, and bringing more workers into the system.
Fidelity says future retirees should prepare for possible changes by increasing savings, considering when to claim benefits, and developing other sources of retirement income.
In the same month that the government announced a 3.6% increase in Social Security benefits in 2027, Fidelity Investments is imagining what 2032 would look like, assuming the trust fund runs out of money.
A new analysis by Fidelity Investments tries to predict how the looming shortfall would affect millions of retirees, just six years from now.
Without congressional action, continuing payroll tax revenue would cover only about 78% of scheduled retirement and survivor benefits. That could mean a 22% reduction in payments, costing an average married couple approximately $10,560 a year, according to Fidelity's estimates.
The problem stems largely from demographics. Americans are living longer, while declining birth rates mean fewer workers are contributing payroll taxes to support a growing population of retirees.
Social Security isn't expected to disappear. Even if its trust fund reserves are depleted, payroll taxes would continue providing money for benefits. However, those revenues would not be sufficient to pay everyone the full amount promised under current law.
Three ways Congress could address the problem
Fidelity identifies three broad approaches lawmakers are considering to strengthen Social Security's finances. Each would affect workers and retirees differently.
1. Change who receives benefits and when
One option would be to gradually increase the full retirement age, currently 67 for people born in 1960 or later.
Some proposals would eventually raise that age to 70 for higher-income workers. Others would change how benefits are calculated, potentially reducing payments for some retirees while increasing them for others.
There are also proposals to change benefits for spouses, survivors, and dependent children.
Such changes could have significant consequences for people approaching retirement, particularly those who have planned their finances around receiving benefits at a specific age.
2. Raise Social Security payroll taxes
Another approach would require higher-income Americans to contribute more to the system.
Currently, workers pay a 6.2% Social Security payroll tax, matched by their employers. In 2026, the tax applies only to the first $184,500 in annual earnings.
Some proposals would eliminate that earnings ceiling, requiring high earners to pay Social Security taxes on all their wages.
Others would preserve the existing ceiling but resume collecting the tax on earnings above $250,000.
Another possibility would increase the combined employer-employee payroll tax rate from 12.4% to 12.6%.
These proposals could generate additional revenue without directly reducing benefits, although they would increase taxes for affected workers and employers.
3. Bring more workers into Social Security
Fidelity notes that approximately 6.3 million state and local government employees do not participate in Social Security, generally because they are covered by separate public retirement systems.
One proposal would require newly-hired state and local government employees to join Social Security, expanding the number of workers paying into the program.
However, the financial impact might be relatively modest. Fidelity cites Congressional Research Service estimates suggesting that including these workers would close only about 4% of Social Security's long-term funding shortfall.
Other proposals would expand participation by increasing the number of legally employed foreign workers contributing payroll taxes or changing certain exemptions.
What a benefit cut could mean for retirement savings
Fidelity also examined what would happen if Congress failed to act and retirees were forced to make up the difference by withdrawing more money from their savings.
The firm considered a hypothetical retired couple with a $500,000 investment portfolio and Social Security benefits reduced by $10,560 annually.
To maintain their standard of living, the couple would initially need to withdraw an additional 2.1% of their portfolio each year.
Assuming annual investment returns of 7% and inflation of 2.5%, Fidelity calculated that the couple would withdraw approximately $118,000 over 10 years just to replace their lost Social Security income.
Including the investment gains they would have missed by withdrawing that money, the total impact on their portfolio could reach approximately $161,000 over the decade.
That example is illustrative rather than a prediction. Actual results would depend on market performance, inflation, and individual spending needs.
What future retirees can do now
While Congress debates possible solutions, Fidelity recommends several steps Americans can take to reduce their exposure to a potential benefit reduction.
One is to consider delaying Social Security benefits. Under current law, waiting until age 70 instead of claiming at full retirement age can increase monthly benefits by approximately 24% for someone whose full retirement age is 67. Claiming as early as age 62 can reduce monthly payments by as much as 30%.
Delaying benefits isn't necessarily the best choice for everyone, however. Health, life expectancy, employment, and other income sources should factor into the decision.
Fidelity also encourages workers to take advantage of retirement savings opportunities, including catch-up contributions available to people age 50 and older.
In 2026, workers can contribute up to $24,500 to many employer-sponsored retirement plans, with additional catch-up contributions available for older workers.
Another option is to create additional predictable retirement income through pensions or income annuities. Annuities can provide regular payments, although they also involve costs, restrictions, and trade-offs that consumers should understand before purchasing one.
Will Congress act before 2032?
Fidelity points out that Congress has confronted Social Security funding problems before. The most significant overhaul occurred in 1983, when lawmakers approved changes that included gradually increasing the full retirement age from 65 to 67.
Historically, major changes have been phased in over many years, often protecting people already receiving benefits.
That precedent offers some reassurance, but there is no guarantee lawmakers will follow the same approach this time.
The central message from Fidelity is that Americans shouldn't assume their future Social Security benefits will necessarily match today's projections.
For people approaching retirement, planning for several possible outcomes — including smaller benefits — may be the best protection against an uncertain future.