Social Security's Newest Problem Has Nothing To Do With Its Trust Fund

Many older adults are having to rethink their retirement plan and leave the workforce early because they can't find work in a weak hiring market. Unfortunately, that early exit not only hurts those individuals, but it's also affecting the Social Security program, which provides benefits that millions of Americans depend on. With Social Security projected to become insolvent just years from now, which could result in benefits being reduced, the weak hiring market poses a real challenge.

If you're nearing retirement age but plan to keep working, here's what you should know about the hiring market and its potential impact on Social Security.

The projected Social Security insolvency date

The 2026 report by the Social Security and Medicare Boards of Trustees projects that the Old-Age and Survivors Insurance (OASI) trust fund may become depleted during the fourth quarter of 2032, one quarter earlier than the 2025 report projected. If the fund becomes depleted, the Social Security program's income from payroll taxes may only be able to pay 78% of the total scheduled benefits.

Such a situation could result in an automatic benefits reduction of about 22% to 24%. According to the Committee for a Responsible Federal Budget, a 24% Social Security benefits cut would average a total of $500 per month. That's more than what the average retired household spends on groceries in a month. In some states, like Connecticut and Delaware, the cut might exceed $500 per month.

Why older Americans are leaving the workforce

According to the Labor Department, about 1 million workers have left the labor force over the past year, and 720,000 workers exited the labor force in June alone. Participation in the labor force has slipped to its lowest level in decades outside the pandemic.

That exodus isn't by choice. Job market opportunities today are very limited, and hiring has been concentrated within certain sectors, like health care, construction, and warehouses. Many industries largely aren't hiring at all.

Older Americans have fewer work opportunities

The part-time roles that retirees once depended on are also increasingly limited. Younger workers are stepping up to fill some of those roles, while automation consumes others.

AI is also taking a toll on the job market. According to Goldman Sachs, AI substitution, in which AI replaces human workers, eliminated approximately 25,000 jobs per month over the past year. AI augmentation, where AI helps existing workers to be more productive, added about 9,000 jobs back into the market.

What happens when retirees claim Social Security early

As retirees leave the workforce early, they likely claim Social Security early, too. But claiming benefits early results in a permanent reduction in the benefit amount.

Individuals may claim Social Security retirement benefits at age 62. To receive full benefits, they must wait to claim until they reach the full retirement age, which is age 67 for an individual born in 1960 or later. If a retiree claims their benefits early, those benefits are permanently reduced, but the retiree might claim the benefits for longer.

It's also important to consider that a retiree who has left the workforce because they can't find work may not have had the chance to reach their retirement contribution goals and might be living on less income than they'd anticipated, so they might feel that they have to claim Social Security benefits early to pay their bills.

How early retirees affect Social Security

With fewer job opportunities, older adults may simply retire early because they can't find work. Doing so has a direct financial impact on Social Security.

Since Social Security depends on payroll taxes paid by current workers, early exits from the workforce amount to years of lost payroll tax revenue for the program. Those early exits also worsen the worker-to-beneficiary ratio, resulting in fewer workers to financially support the benefits that retirees are claiming.

Because early retirees' benefits are reduced, the impact on the Social Security program is usually offset. However, the loss of payroll tax revenue may have a significant impact, especially as the program moves toward insolvency.

Making the decision to retire early

If you feel you're being pushed toward claiming Social Security early because of the tough job market, it's important to do some math and planning to ensure you make the decision that's right for you. On their site, you are able to review the Social Security retirement planner to see how claiming benefits early could reduce your monthly payment. 

Consider how much your permanently reduced benefits may cost you over time, and explore other options. For example, if you have other savings, like a 401(k), you might draw down from your retirement account to create a "bridge" until you reach the full retirement age to claim Social Security benefits. You might also explore delaying your retirement if that's a possibility, or even transitioning to part-time work to avoid locking in a lower monthly benefit.

Bottom line

The current workforce is challenging for many, but it's made it particularly difficult for older adults to gain new employment or, in some instances, to keep their jobs. The movement toward early retirement is further straining the Social Security program, even as Congress works to find a solution to the program's approaching insolvency date.

With the future of Social Security being uncertain, this is a good time to revisit your retirement budget. Stress-test your retirement plan to see how it holds up with a lower Social Security benefit to determine how you might do if you claim benefits early or if benefits were to be cut.