Millions of seniors today get much or all of their retirement income from Social Security. If you're still working but planning for retirement, you're probably factoring those benefits into your calculations.
Unfortunately, those benefits may end up being stingier than expected. That's because Social Security may be forced to cut benefits as early as 2035.
In the coming years, Social Security is expected to owe more money in benefits than it collects in revenue. A big reason is that baby boomers are expected to exit the workforce in droves, thereby cutting the program's primary revenue stream -- payroll taxes.
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Social Security has trust funds it can tap to keep up with scheduled benefits, but once those funds run dry, significant cuts will be on the table. Meanwhile, in their latest report, the Social Security Trustees estimated that the program's trust funds will be out of money by 2035. That's a year later than their initial projection. But it still means benefit cuts are something that current and future Social Security recipients may need to grapple with.
But are benefit cuts guaranteed to happen? No.
In fact, lawmakers have a prime opportunity to prevent a universal reduction in Social Security benefits. But whether they're able to act in time is a different story.
Benefit cuts are preventable
The fact that Social Security is facing an income shortfall isn't news. And at this point, lawmakers need to get serious about finding a solution to address that shortfall. But if they act quickly enough, benefit cuts may be preventable.
What can lawmakers do? For one thing, they can implement changes that pump more revenue into Social Security.
As mentioned earlier, the program anticipates reduced revenue due to baby boomers retiring and not paying in via taxed wages. But raising the wage cap for workers could help compensate for that.
Right now, earnings above $147,000 a year aren't taxed for Social Security purposes. Raising that limit is a fairly easy way (albeit an unpopular one among the wealthy) to boost Social Security's revenue.
Another option lawmakers can look at is pushing back full retirement age to collect benefits. Right now, that age is 67 for those born in 1960 or later. Moving it to 68 or 69 isn't unreasonable, given today's longer life expectancies, and that alone could help with Social Security's financial crunch.
These are just two of several proposals on the table that could help Social Security. To be clear, benefit cuts do not have to be a given. But to avoid them, lawmakers need to take action, and soon.
In the meantime, if you're still working, gear up for benefit cuts by boosting your savings rate to compensate. If you pump more money into your 401(k) or IRA but benefits aren't slashed, guess what? You'll just have that much more savings on hand for your senior years. But that way, you'll also have some protection in case benefits cuts end up being everyone's unwanted reality.
