How Social Security’s Bankruptcy Will Affect Your Retirement


According to the Social Security Board of Trustees’ 2022 report, the Social Security trust fund will be depleted by 2035. Demographic trends are driving the depletion of the trust. Today, we have more retirees collecting benefits – and living longer. Also, birth rates have also decreased, leaving fewer workers to pay into the system.

Even if the Social Security trust fund does run out, it doesn’t mean benefits go to zero. Right now, about 6.4% of Social Security’s total outflows come from the trust. The other 93.6% come from tax revenue.

If the trust fund runs out in 2035, Social Security is projected to only pay out around 80% of the benefits that were entitled to everyone. So, how would a 20% reduction in Social Security benefits in 2035 affect someone’s retirement plan? Let’s revisit our old friends Pilot Pete and Chef Steve and find out.


We’ll use the same assumptions we’ve made in prior blog posts (here and here) for Pilot Pete and Chef Steve. They’ve saved $1 million and expect to spend $6,000 per month in retirement. Their Social Security retirement benefits at Full Retirement Age are $2,304 per month. Since Pilot Pete applies at age 62, his benefits are reduced to $1,613 per month. Chef Steve, however, waits until age 70 to apply for benefits. By delaying, he will receive $2,857 per month when he finally applies.

Apply Early vs. Delay Until 70 Assumptions

Life Expectancy

In prior posts (here and here), we’ve examined the results for Pilot Pete and Chef Steve using a couple of different life expectancy assumptions. In the first scenario, we planned for each to live into their early 90s. There are several reasons to assume a long life for financial planning purposes, which I will address in a future post.

We also looked at their retirement results assuming they lived until the average life expectancy at birth in the U.S. According to the Organization for Economic Co-operation and Development (OECD), U.S. life expectancy at birth is 76.1 years for men and 81.1 years for women.

In our analysis today, we’ll examine both scenarios.

Retirement Projections: Apply at 62

When we run a Monte Carlo retirement analysis for Pilot Pete, we find that the projected Social Security bankruptcy in 2035 lowers his probability of success from 78% to 65%, assuming he and his wife live to 92 and 94, respectively. That’s a significant reduction in his chances of retirement success.

When we assume the average U.S. life expectancy for Pilot Pete and his wife, Sally, we see that their probability of retirement success comes in at 98%, even with a Social Security bankruptcy event. That’s virtually no change from his probability of retirement success without the Social Security trust going bankrupt.

So, Pilot Pete may be cutting things close if he lives a long life. If not, he’ll most likely be okay. But how does he stack up to Chef Steve? Will delaying Social Security make a difference?

Retirement Projections: Apply at 70

As it turns out, timing does not make a big difference if we assume that the Social Security trust bankruptcy will cause a 20% reduction in benefits starting in 2035. Assuming life expectancies of 92 and 94 for Chef Steve and his wife, Suzie, respectively, their Monte Carlo probability of retirement success comes in at only 64%. That’s 1% lower than Pilot Pete’s chances.

When we assume the average U.S. life expectancy, Chef Steve loses out to Pilot Pete again. In this case, Chef Steve has a 95% probability of success, 3% lower than Pilot Pete’s chances and 2% lower than our analysis that assumed full Social Security retirement benefits over their lives.

Retirement Projections: Apply at FRA

Of course, we’ve yet to examine how our friends Pete and Steve would fare if they applied at Full Retirement Age of 67. As it turns out, this is, once again, the optimal age for them to apply if we plan for their benefits to be reduced by 20% in 2035. If they applied at their FRA, they would see their Monte Carlo probability of retirement success come in at 70% with our longer life expectancy assumptions. If we assume average life expectancy, their odds come in at 97%.

Social Security Bankruptcy – Deciding Factors

It’s clear that, when we plan for the Social Security trust fund to be depleted in 2035, as projected, the incentive to delay Social Security retirement benefits to receive a higher monthly payment goes away. It adds another form of risk to most retirement plans. It also means they’ll need to be more diligent with their retirement cash flow if they expect to live well into old age.

Again, timing Social Security benefits does not move the needle much for those with a 90% or higher Monte Carlo probability of success. For people fortunate enough to have retirement projections that high, a projected Social Security bankruptcy lowers the incentive to delay benefits.

For retirees who have Monte Carlo probabilities less than 90%, delaying Social Security benefits should be approached with caution. At the very least, they may want to add a scenario to their financial plan that reduces Social Security retirement benefits by 20% in 2035 to see how they are affected. Applying early may give them the best shot at a successful retirement.

If you need help figuring out optimizing your Social Security benefits, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

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