The Congressional Budget Office (CBO) has released a controversial new budget option that aims to shore up the federal government’s finances by targeting the retirement checks of high-income Americans.
With the federal deficit hitting a staggering $1.8 trillion in Fiscal Year 2025 and the Social Security insolvency clock ticking down to 2033, this proposal offers a stark look at one potential “fix”: changing the math to pay the wealthy less.
The $1.8 Trillion Deficit Reality
These proposals come at a time of severe fiscal strain. The federal budget deficit for Fiscal Year 2025 totaled roughly $1.8 trillion.
While revenues increased to $5.2 trillion, outlays ballooned to $7.0 trillion, driven by rising costs in mandatory programs like Social Security and Medicare, as well as interest on the national debt.
Social Security’s Role in the Red Ink
Although Social Security is technically “off-budget,” it plays a major role in the unified federal deficit. Since 2021, the program has been running a cash-flow deficit, meaning it pays out more in benefits than it collects in payroll taxes.
In 2024 alone, the program had to redeem tens of billions from its trust funds to cover the shortfall, directly contributing to the government’s borrowing needs.
The 2033 Insolvency Clock
According to the 2025 Social Security Trustees Report, the Old-Age and Survivors Insurance (OASI) Trust Fund is projected to be depleted by 2033. If combined with the Disability Insurance (DI) fund, the insolvency date pushes slightly to 2034.
The Proposal: Targeting the “Bend Points”
The CBO’s report, titled “Reduce Social Security Benefits for High Earners,” outlines a plan to fundamentally alter the formula used to calculate your monthly benefit.
Currently, the Social Security Administration uses a progressive formula with three “bend points” to determine your Primary Insurance Amount (PIA). This formula replaces a higher percentage of income for low earners than for high earners.
What Are Social Security Bend Points?
To understand the cut, you have to understand the current math. Social Security doesn’t just cut you a check for a flat percentage of your final salary. Instead, it takes your average monthly earnings (indexed for inflation) and runs them through a progressive filter, similar to tax brackets.
The Current Law Formula for 2025:
Tier 1: It replaces 90% of the first $1,226 of your monthly earnings.
Tier 2: It replaces 32% of earnings between $1,226 and $7,391
Tier 3: It replaces 15% of any earnings above $7,391
Here is a real life example.
If you earn $8,000 a month on average:
First $1,226 × 90% = $1,103
Next $6,165 ($7,391 – $1,226) × 32% = $1,972
Remaining $609 ($8,000 – $7,391) × 15% = $91
Total Monthly Benefit: $3,166
How the Math Changes Under Revised CBO Proposal
The CBO option proposes adding a new, fourth bend point and drastically reducing the payout factors for earnings above it.
The new formula would likely look like this: 90%, 32%, 10%, and 5%.
This effectively slashes the replacement rate for every dollar earned above the new threshold.
Option 1: The “Top 30%” Cut
The first alternative in the CBO report suggests setting this new bend point at the 70th percentile of earners.
This means the top 30% of new retirees would see their benefits reduced compared to current law.
This change would be phased in over nine years starting in January 2026.
Option 2: The “Top 50%” Cut
This is the most sweeping alternative. It sets the new bend point at the 50th percentile of earners.
In simple terms, this defines “High Earner” not as a millionaire, but as anyone earning more than the median worker; roughly $60,000 to $70,000 a year in today’s dollars.
In this scenario, half of all new retirees; essentially anyone earning an above-average salary, would face benefit reductions. Like the first option, this would also be phased in over nine years.
Who is the “Top 50%”?
If you are in the “Top 50%,” you aren’t necessarily rich.
You are simply earning an above-average wage. Under this proposal, if your average career earnings are above the median (the new bend point), every dollar you earn above that line generates significantly less retirement income than it does today.
Current Law: You get 32 cents back for every dollar earned in the middle bracket.
Proposed Law: You might only get 10 cents or 5 cents back for those same dollars.
Impact Analysis: A Hypothetical Cut
Let’s look at how this hits a worker earning $6,500/month (approx. $78k/year), assuming the new “50th percentile” bend point is set at $5,500.
Under Current Law: The $1,000 earned above $5,500 is multiplied by 32%. You get $320 monthly from that chunk of salary.
Under New Proposal: That same $1,000 might be multiplied by 10% (or less). You get only $100 monthly from that chunk.
The Result: A permanent loss of $220 every single month in retirement income.
Option 3: The “Fast Track” Cut
The third and most severe alternative mirrors Option 2 by targeting the top 50% of earners but accelerates the pain.
Instead of a nine-year phase-in, the cuts would be fully implemented over just five years.
This would generate savings much faster but would result in a steeper drop-off for near-retirees.
Potential Savings: Up to $197 Billion
The CBO estimates that these changes would reduce federal spending significantly between 2025 and 2034.
Option 1 would save approximately $48 billion.
Option 2 would save approximately $117 billion.
Option 3 would save approximately $197 billion.
The Cost of Doing Nothing
If Congress fails to act before the trust funds run dry, the law mandates an automatic, across-the-board benefit cut. The Trustees estimate this cut would be roughly 21% to 23%, affecting every beneficiary regardless of age or income level.
A Political Minefield
While the CBO provides the math, the politics remain treacherous.
“Means-testing” Social Security changes the program from an earned benefit into a welfare-style safety net, a shift that has historically faced fierce opposition from both parties.
However, with the 2033 deadline looming, options that were once considered “third rails” are increasingly ending up on the negotiation table.
Could a Drastic Cut Impacting 50% of Newly Eligible Beneficiaries Really Happen?
Though just a policy option for now, the fact that this proposal appears in an official CBO publication signals how far the debate has shifted.
The CBO proposal was published on Dec 12, 2024. Since then we have a new administration in charge so it is quite possible that these might not be implemented right away.
However, the latest Social Security Trustees report published has raised alarm bells. The report indicated that the Trust Fund is expected to be insolvent a year sooner than anticipated primarily due to the Social Security Fairness Act signed by President Biden which increased benefits for government workers.
As budget pressures mount, radical ideas that once seemed unthinkable like slashing future benefits for millions could be squarely on the table.
Like Financial Freedom Countdown content? Be sure to follow us!
Car Loan Delinquencies Hit 15-Year High as Student-Loan Payments Return
More Americans are falling behind on their car loans than at any point in the last 15 years, a troubling milestone that underscores how fragile household finances have become in 2025. Economists say the long-delayed return of student-loan payments is a key; and often overlooked driver behind the surge in auto delinquencies now rippling through the economy.
Car Loan Delinquencies Hit 15-Year High as Student-Loan Payments Return
The $270,000 Retirement Trap: Vanguard Says You’re Planning for Health Care Costs All Wrong
Health care costs in retirement are consistently cited as the single greatest financial worry for pre-retirees and retirees. Experts, like those at the Employee Benefit Research Institute (EBRI), have quantified the savings needed for a 65-year-old couple at a daunting $270,000 to cover total health care premiums and out-of-pocket costs throughout retirement (excluding long-term care). However, new research from Vanguard, in partnership with Mercer Health & Benefits, suggests that focusing on this large, lifetime lump sum is not only overwhelming but also the wrong way to plan.
The $270,000 Retirement Trap: Vanguard Says You’re Planning for Health Care Costs All Wrong
Seniors Receiving Their COLA Notices This Week Are Shocked As the 2.8% Raise Already ‘Wiped Out’ by Rising Costs
Most older Americans say the much-anticipated 2.8% Social Security cost-of-living adjustment for 2026 is already falling short. As COLA letters land in mailboxes this week, a striking 77% of Americans age 50 and over tell AARP the increase doesn’t come close to matching real inflation; and experts warn that rising Medicare premiums could wipe out what little boost retirees are getting.
Seniors Receiving Their COLA Notices This Week Are Shocked As the 2.8% Raise Already ‘Wiped Out’ by Rising Costs
Did you find this article helpful? We’d love to hear your thoughts! Leave a comment with the box on the left-hand side of the screen and share your thoughts.
Also, do you want to stay up-to-date on our latest content?
1. Follow us by clicking the [+ Follow] button above,
2. Give the article a Thumbs Up on the top-left side of the screen.
3. And lastly, if you think this information would benefit your friends and family, don’t hesitate to share it with them!
John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
Here are his recommended tools
Personal Capital: This is a free tool John uses to track his net worth on a regular basis and as a retirement planner. It also alerts him wrt hidden fees and has a budget tracker included.
Platforms like Yieldstreet provide investment options in art, legal, real estate, structured notes, venture capital, etc. They also have fixed-income portfolios spread across multiple asset classes with a single investment with low minimums of $10,000.
