Social Security provides monthly benefits to millions of retired seniors. And some of those seniors depend on the program for the bulk of their income.
That's proven to be a problematic thing this year in particular. Although Social Security recipients got a generous 5.9% raise going into 2022, at this point, the rate of inflation is far outpacing that boost. That means seniors who live mostly on Social Security are losing buying power even at a time when they're sitting on a higher raise.
But that's not the only issue with depending heavily on Social Security. In the not-so-distant future, Social Security may have to cut benefits to the tune of 20% due to a revenue shortfall. And that could leave many seniors in the lurch.
Why benefit cuts are a distinct possibility
In the coming years, Social Security expects to owe more in benefits than it collects in revenue, due largely to an anticipated mass exodus of baby boomers from the workforce. The good news is that Social Security has trust funds it can tap to keep up with scheduled benefits. But once those trust funds run out of money, benefit cuts will be back on the table.
Meanwhile, the Social Security Trustees recently released their 2022 report, and it projects that the program's trust funds will run out of money in 2035. From there, Social Security may have to slash benefits by 20% unless lawmakers come up with a solution to address the program's financial shortfall.
To be clear, lawmakers are working on the problem (or at least some are). But whether benefit cuts are actually avoidable is yet to be determined, so it's important to plan for them.
Today's workers can avoid a future financial crunch
Current retirees have some, albeit limited, options for preparing for benefit cuts. But those who aren't yet retired have a prime opportunity to position themselves to withstand a reduction in future benefits.
That's because anyone still earning a paycheck can make an effort to fund a retirement plan. And it doesn't necessarily take a ton of money on a monthly basis to build a solid nest egg.
Take a 37-year-old worker, for example, with 30 more years until retirement. If that worker were to put $300 a month into a retirement plan and invest it at an average annual 8% return (which is a bit below the stock market's average), their nest egg would be worth about $408,000. That could, in turn, be a good way to compensate for smaller Social Security benefits down the line.
Now this isn't to say that today's seniors can't do anything to shore up their finances in anticipation of future benefit cuts. While it may be too late to build a sizable nest egg, current Social Security recipients can try cutting expenses or working part-time to boost their income and build up some modest savings.
But all told, current and future Social Security beneficiaries do need to prepare for a 20% pay cut. It's a scary thought, but it's something that isn't expected to happen for over 10 years, which means there's time to shift plans around to account for that possibility.