What the Growing Federal Deficit Could Mean for Your Retirement

Concerns about the federal deficit have many people nearing retirement wondering how it might affect their financial future. Could taxes rise? Will inflation remain elevated? Could Social Security change?

Those are important questions. But the better question is this: would your retirement plan still work if any of those things happened?

No one knows exactly how Congress will address the country’s fiscal challenges, but understanding the possibilities can help you build a retirement plan that’s prepared for more than one outcome.

How Large Is the Federal Deficit?

According to the Congressional Budget Office, total federal spending in 2026 is projected at $7.4 trillion against revenues of roughly $5.6 trillion — a deficit of $1.8 trillion, or 23.3% above what the government collects. To put that in perspective, the federal government is borrowing one dollar for every four it spends. For retirees, those numbers matter because they influence many of the assumptions that go into a retirement plan, including future tax policy, interest rates, inflation, and Social Security.

According to J.P. Morgan’s “Five Scenarios for the Federal Debt,” federal debt held by the public is projected to rise from roughly 100% of GDP today to 120% by 2036 under the CBO’s baseline and potentially as high as 127.7% if current tax breaks are made permanent and tariff revenues underperform projections.

The Federal Government’s Only Options and Why the Likely Path Matters to You

At its core, the math isn’t complicated. When government spending exceeds income, there are only four ways to close the gap: raise taxes, reduce benefits for current recipients, reduce benefits for future recipients, or borrow the difference.

In practice, not all options are equally likely. Historically, Congress has been reluctant to reduce benefits for current retirees, and raising taxes has also proven politically difficult. Millions of Americans depend on Social Security and Medicare, making major changes challenging regardless of which party is in power.

That has left borrowing as the path lawmakers usually rely on. But borrowing doesn’t resolve the underlying imbalance and can make the problem worse. As debt levels rise, upward pressure on interest rates, borrowing costs, and inflation follows. J.P. Morgan estimates that rising debt could push long-term Treasury yields up by nearly 90 basis points over the next decade, increasing borrowing costs and creating challenges for both bond portfolios and the broader economy.

None of this tells us exactly what will happen next, but it does explain why retirement plans should account for more than one possible outcome.

The One Number That Touches Your Plan: Social Security

For most retirees, the federal deficit matters only if it eventually affects the income they rely on. That’s where Social Security enters the conversation.

According to the most recent Social Security Trustees’ Report, the Old-Age and Survivors Insurance (OASI) Trust Fund is projected to be depleted in 2032.

The word you’ll hear attached to these projections is insolvency, which can sound alarming if you don’t know what it means in this context. It does not mean Social Security disappears or that checks stop. Instead, it indicates that the trust fund reserves run out, and the program pays benefits from ongoing payroll tax revenue alone at reduced levels, unless Congress acts.

If Congress takes no action before then, incoming payroll tax revenue would still fund a substantial portion of promised benefits, but not all of them. The Trustees estimate that benefits would need to be reduced by approximately 22% across the board to match available revenue.

How We Account for This in Retirement Planning

At LRA, we don’t believe successful retirement planning depends on predicting what Congress will do. We believe in building plans with enough resiliency to withstand a range of outcomes.

Our view is straightforward. Continued borrowing appears more likely than dramatic benefit cuts for current retirees, although no one knows exactly how lawmakers will proceed. Because borrowing can influence inflation, interest rates, and long-term government finances, we believe it’s prudent to account for those possibilities.

That leads us to build plans that remain resilient even if future Social Security benefits are lower than today’s projections.

Given the Trustees’ projection that benefits could be reduced by 22% if the trust fund were depleted without legislative intervention, we have begun incorporating a similar reduction into many client retirement projections. In other words, we often build retirement plans assuming clients may receive less than their currently projected Social Security benefit.

We hope those reductions never occur, but would rather help clients prepare for a more challenging scenario and be pleasantly surprised than build a plan that depends on the most optimistic outcome. If benefits are fully preserved, that creates additional flexibility. If they aren’t, the plan has already accounted for the difference. That is how we build resilience.

Focus on What You Can Control

No one can say with certainty how the federal deficit, national debt, or Social Security funding challenges will ultimately be addressed. What matters is understanding how different outcomes could affect your retirement plan and ensuring you are prepared for them.

Just as an individual can improve their finances only by earning more or spending less, the government faces the same arithmetic. The longer those decisions are deferred, the fewer options remain. A well-designed retirement plan should be flexible enough to adapt to changing tax laws, benefit levels, and economic realities.

If your current retirement projections assume full Social Security benefits and haven’t been reviewed recently, give us a call. We can’t predict the future, but we can build a retirement plan that aims to hold up across a wide range of possible futures.

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Lake Road Advisors (LRA) is a virtual wealth management firm headquartered in Corning, NY, with offices in Ithaca, NY, and Vancouver, WA. Founded by Paul Sydlansky, CFP®, in 2016, it serves successful couples planning their next chapter—whether that’s retirement, part-time work, or a less demanding second act. Paul has worked in the financial services industry for 25+ years. Prior to founding Lake Road Advisors, he worked at Morgan Stanley in Manhattan for 13 years, where he was a senior-level manager within the Institutional Equities Department. In 2018, he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER® and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. They can be reached by phone at the Corning, NY office at (607) 438-2914, Ithaca, NY office at (607) 463-8400, or Vancouver, WA office at (607) 292-2172 or at the firm’s website at https://www.lakeroadadvisors.com/

This material has been edited with the assistance of artificial intelligence tools. The information presented is based on sources believed to be reliable and accurate at the time of publication. This material is for educational purposes only and does not necessarily reflect the views of the author, presenter, or affiliated organizations. It should not be construed as investment, tax, legal, or other professional advice. Always consult a qualified professional regarding your specific situation before making any decisions.