If you’ve been following Social Security news, you may be aware that the program is facing some serious fiscal challenges. In the coming years, Social Security is expected to spend more on scheduled benefits than it collects in payroll tax revenue. This is due largely to the substantial number of baby boomers expected to exit the workforce in short order.
Social Security has trust funds it can tap to keep up with scheduled benefits — but only to a point. And once those trust funds run dry — which could happen as soon as 2034, according to recent projections — the program may have no choice but to implement benefit cuts. Once that happens, Social Security recipients could see their monthly checks reduced by 20% or more.
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In a recent Nationwide survey of older Americans, 71% of pre-retirees said that Social Security cuts could have a big impact on their financial stability. And 74% of current retirees said the same.
But just how likely are Social Security cuts? And do workers and retirees alike really need to panic?
We’ve been here before
The idea of Social Security cuts may seem scary. But it may comfort you to know that this isn’t the first time the program has faced the idea of a reduction in benefits.
Back in 1983, Social Security found itself on the brink of insolvency, and lawmakers had to make changes — notably, an increase in retirement age — to keep the program afloat and avoid benefit cuts. But ultimately, those cuts were avoided.
Today’s situation is a bit different in that lawmakers have a pretty solid heads-up about the program’s trust fund depletion date. So in the course of the next decade, they have time to take action.
To be clear, though, lawmakers shouldn’t just sit on their hands for the next nine years and change. Some of the changes that may be required to prevent Social Security cuts could take time — years — to phase in. So lawmakers do need to act pretty quickly if they want Social Security to be able to continue paying scheduled benefits.
But the situation is far from hopeless. And Social Security cuts are by no means guaranteed to happen.
Save aggressively, just in case
While there’s a good chance lawmakers will manage to prevent Social Security cuts in the coming years, it’s still a wise idea to save as much as you can for retirement in case they fail to do so. Even if Social Security benefits aren’t slashed, the reality is that living on those monthly paychecks alone isn’t optimal.
If you’re an average earner, at present, Social Security will replace about 40% of your pre-retirement income. Most retirees need roughly double that sum to keep up with their expenses and live comfortably. So regardless of how concerned you are with Social Security cuts, your best bet is to contribute money to a retirement plan on a regular basis, and invest your money so it grows year after year.
It’s too soon to tell whether Social Security will cut benefits or not. But having extra savings puts you in a strong financial position either way.
