Most Americans have one goal in mind: to cross the retirement "finish line" comfortably, and on their own terms. But for many, the only way this is going to happen is with a lot of help from Social Security. Data from the Social Security Administration (SSA) shows that around three out of five retired workers receiving benefits is counting on their Social Security check for at least half of their monthly income. By comparison, the SSA suggests that Social Security is only intended to replace about 40% of a retirees' working wages. 

Social Security is in trouble, new report shows

This heavy reliance on Social Security, coupled with a number of demographic changes, including the ongoing retirement of baby boomers and the lengthening of life expectancies, is weighing on this critical social program.

Social Security cards stacked atop each other.

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According to the latest report from the Social Security Board of Trustees, which was released a little more than a week ago, the Trust is expected to reach $3 trillion in asset reserves by 2022, at which point it'll begin paying out more in benefits than it generates in revenue. By the year 2034, this $3 trillion will be gone, which will eliminate the interest revenue Social Security generates from its spare cash. More importantly, it'll bring the programs' $12.5 trillion, 75-year cash shortfall firmly into focus. The end result, per the report, is an expected 23% reduction in benefits for current and future retirees, assuming Congress passes no new legislation over the next 17 years. 

It's not exactly the rosiest outlook for current and future retirees given their reliance on Social Security.

But the bigger issue is what should be done about this imminent cash shortfall. Should Congress allow these across-the-board benefits cuts to take place, or should other measures be put into place to ensure that today's and future generations of retirees have a relatively consistent payout expectation from Social Security? Let's take a look.

The case against cutting Social Security benefits

There are obviously very strong feelings among the public against a steep cut to their Social Security benefits. As noted above, a majority of seniors relies on Social Security, meaning a large cut in benefits could push millions of seniors below the poverty rate, which would be unacceptable.

Scissors cutting through a hundred dollar bill, implying imminent Social Security benefit cuts.

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A prime reason to consider fixing the problem with additional revenue is the fact that multiple alternative plans already exist. Both Democrats and Republicans have put forth a number of proposals that would eliminate the 75-year cash shortfall and allow seniors to continue receiving benefits that are more or less commensurate with today's levels. In particular, Democrats have suggested lifting the payroll tax earnings cap, which would require the wealthy to pay more into the system, while select Republican fixes have aimed to lift the minimum monthly benefit paid to low-income retired workers. 

The big issue has been that since both parties' plans work, neither side will agree to work with the other. A bipartisan plan would truly be the best solution for Social Security, but political hubris is currently getting in the way. This is hardly a reasonable excuse not to get things done.

Another reason to argue against allowing benefits to be chopped by up to 23% is the sheer number of retirees who've enrolled at the earliest age possible, age 62. According to an analysis by the Center for Retirement Research at Boston College, 45% of seniors claim benefits at age 62, thereby accepting a 25% to 30% permanent reduction from their full retirement age benefit (the age where you become eligible to receive 100% of your monthly payout). If a 23% benefit cut were allowed to come to fruition, those who claim at age 62 could see an aggregate cut of up to 42% to 46% in their monthly payment by 2034.

Though some of these early filers may have made an uninformed decision to enroll so quickly, others have very good reasons for doing so. For instance, people in poor health, lower-income spouses, and retirees who can't find a job or source of income, may be making a smart choice by enrolling early. These folks would be punished pretty hard for that early enrollment if Congress sits back and does nothing.

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The case in favor of cutting Social Security benefits

Then again, cutting benefits may not be as terrible an idea as you think. Before you burn the village, allow me to explain.

To begin with, if Congress chooses to sit back and simply adjusts benefits lower based on the projections offered by the Trustees, it would have effectively resolved the 75-year cash shortfall with practically no effort. Doing nothing and cutting benefits isn't exactly the most popular solution -- in fact, it's the least popular among the public -- but it would unequivocally solve Social Security's crisis. But, there's more to it than just this.

The more deeply rooted issue is that baby boomers, and the generations that follow them, have become more reliant on Social Security than previous generations. This is a direct correlation to personal household saving rates being halved over the past five decades. In plainer terms, people aren't saving enough money anymore, nor are they being smart with what they have saved. According to Gallup in April of last year, just 52% of those surveyed were invested in the stock market, which is arguably the greatest source of long-term wealth creation. 

Why's this important? If Congress chooses to sit on its laurels and allows Social Security benefits to be cut, or at least gives the American public the impression that cuts are looming, it'll encourage today's working Americans to take saving and investing more seriously. If we can get more people to formulate a budget and stick to it, as well as invest at least some of their money into the stock market over the long run, there's a really good chance that future retirees won't lean on the program as hard. I fully admit, this is a somewhat deceptive plan, but it gets the job done by putting future generations on a more solid financial foundation.

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Which would you choose?

As you can see, the decision of whether or not to allow benefits to be cut isn't as cut-and-dried as you might expect. A benefits cut fixes Social Security's funding gap, and it should encourage better saving and investing habits for future generations. At the same time, it hurts those who have no choice but to claim early, and it could push millions of baby boomers firmly below the federal poverty level.

Which pathway would you choose?

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