Over half of current workers think Social Security will be their primary source of retirement income, according to a Nationwide survey, and that's a big problem.

Social Security's spending is expected to grow substantially faster than GDP through the mid-2030s because of aging baby boomers and fewer workers and as a result, the latest report from the trustees of the Social Security trust fund estimate that an across-the-board cut to benefits is looming. Can Social Security survive?

Income uncertainty

According to the Employee Benefit Research Institute (EBRI) 2018 Retirement Confidence Survey, only 7% of American workers are very confident that Social Security will pay them benefits in retirement that equal the benefits that are being paid to current Social Security recipients.

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There's good reason for their pessimism. A pay-as-you-go system, Social Security payments to current recipients has outstripped payroll taxes collected since 2010. Since then, the program's made up the difference by using interest earned on the trust fund that it built up when taxes collected were greater than outlays. However, interest on the trust fund will cease being enough to close the gap beginning in 2018, and as a result, paying future retirees what they're entitled to will require drawing down the $2.9 trillion trust fund until its exhausted.

According to Social Security's trustees, that will happen in 2034 and at that point, the program will be forced to cut everyone's benefit by about 25% to bring its spending back in line with tax revenue.

An across-the-board 25% cut in benefits would deal a decisive blow to millions of retiree's financial security. As it stands today, 67% of those collecting Social Security say it's a major source of their income.

If left unfixed, the potential Social Security crisis will force retirees to supplement retirement income with withdrawals from their employer-sponsored retirement plans, IRAs, or personal savings. Unfortunately, for many that will mean drawing down a lifetime of savings more rapidly than originally intended, leaving them without a cushion when they're older and likely to face increases in spending because of declining health.

An impossible position

Workers may have to rely less on Social Security income in the future, yet retirement savings figures suggest average Americans won't be able to replace a dramatic cut to Social Security.

Retirement savings rates among current workers indicate average Americans aren't contributing enough money to accounts that can provide them with the income in retirement. Only six out of every 10 workers are saving for retirement and of those who are contributing to a 401(k) plan at work, the average balance finished 2017 at $104,300, according to Fidelity Investments.

That's unlikely to be enough. In order to avoid running out of money later in retirement, it's commonly recommended that retirees only withdraw 4% of their savings every year.

Proper planning

The average person participating in a workplace retirement plans is contributing about 8.6% of their income to their 401(k). That's not bad, but it's increasingly likely that most workers will need to be contributing 10% to 15% per year to their accounts if they really want to achieve financial security in their golden years.

The problem could be compounded by current workers overestimating how long they're remain in the workforce. Many Americans think they'll continue to work in retirement, yet only about one-quarter of current retirees report they're still working. Job loss and declining health are most frequently cited by those who are forced to claim Social Security early or stop working in retirement.

If saving up to 15% of your income every year seems impossible, employers are increasingly offering tools that can help you save more money annually without it busting your budget. For instance, workplace retirement plans increasingly offer an auto escalation feature that allows you to increase your contribution rate automatically every year by a fixed percentage, such as by 1% or 2% per year. Small increases like this are less likely to be noticed in your monthly budget, yet they can get you contributing between 10% to 15% of your income to these accounts within a few years.

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Will Social Security fail?

Social Security has headwinds that could force changes, but even if Congress fails to fix Social Security, it will still be able to provide about 75% of anticipated benefits after the trust fund runs dry. The exact amount Social Security will pay you in retirement depends on your earnings over your career, but for perspective, the average couple is collecting $2,340 in Social Security in 2018 and if you cut that figure by 25%, it would drop to $1,755. 

Washington could avoid such a dramatic reduction in benefits in the future in a few ways, but none of the fixes are likely to be popular. Increasing the payroll tax rate; increasing the amount of earnings subject to payroll taxes; adjusting how future benefits increase because of inflation; and increasing the age at which people can retire and collect 100% of their benefits are all possibilities, and each is far from a perfect solution.

Even if Congress doesn't fix Social Security, it will survive, but smart, future retirees would be best served planning for a worst-case scenario, and that includes taking full advantage of strategies designed to increase savings.

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