Millions of seniors today regard Social Security as an important source of income. But the program has some financial issues it needs to sort out. And if that doesn't happen, benefit cuts could be a distinct possibility in the not-so-distant future.
It's not surprising, then, to learn that 44% of Americans don't think Social Security will be there for them when it's time to claim benefits, according to Northwestern Mutual's 2022 Planning & Progress Study. But while it's easy to see why some people might be ready to give up on Social Security, the reality is that all isn't lost.
Benefits aren't disappearing
It's absolutely true that Social Security recipients may be looking at benefits cuts in a little over 10 years if the program doesn't find a way to shore up its finances. And recent reports indicate that those benefits cuts may end up in the ballpark of 20%.
For current seniors who get most or all of their income from Social Security, that sort of loss would be unquestionably catastrophic. But let's also be clear -- there's a big difference between benefit cuts and getting no benefits at all. The latter scenario is not at all on the table for one big reason.
Social Security gets the bulk of its revenue from payroll taxes -- the taxes most of us moan about paying. Since there are no plans for those payroll taxes to disappear, Social Security should be in a position to continue paying out the bulk of its benefits for many years to come.
But Social Security may need to cut benefits if a solution isn't reached to pump more money into the program as baby boomers exist the workforce in droves, thereby pulling money out of the program and pumping less money into it. And so far, no great solutions are on the table.
How worried should you be?
If you're concerned that Social Security won't be there for you in retirement, you should know that for the most part, you should still be in line for a monthly benefit -- even if you still have many decades in the workforce ahead of you. That said, even if benefits aren't cut, Social Security will only replace about 40% of your pre-retirement income if you're an average earner. And if you're an above-average earner, it will replace even less.
That's why you really shouldn't bank on Social Security too heavily, regardless of whether benefit cuts stay on the table or not. Instead, you should make an effort to build yourself a solid nest egg so you have money to cover your expenses once you stop bringing home a paycheck.
If you sock away $400 a month in a retirement plan over a 40-year period and invest heavily in stocks, you might generate an average yearly 8% return in your portfolio. That's actually a bit below the stock market's average. And in that case, you'll have a $1.24 million nest egg to look forward to.
It's important to be realistic
There's no need to write off Social Security for your retirement. But it's also a good idea to not plan to rely too heavily on those benefits. Saving on your own is a great way to help ensure that your retirement is free of financial worries -- even if benefit cuts do end up coming down the pike.