If you're a member of the workforce, then you're certainly used to paying Social Security taxes on your income. Specifically, you're subject to a 12.4% Social Security tax rate on your first $137,700 in wages this year (beyond that threshold, those taxes don't apply). If you're a salaried worker, you'll pay half of that amount and your employer will cover the rest. If you're self-employed, unfortunately, you're stuck paying the entire 12.4%.
Of course, the upside of paying all of those taxes is the assurance that when you retire, you'll be entitled to collect Social Security yourself. Currently, the average senior receives about $1,500 a month in benefits, but if your wages are above average, you may be entitled to a lot more.
But Social Security is facing a series of financial challenges that could force it to cut benefits as early as 2035. If that happens, the monthly income you expect to collect from Social Security could end up being much lower in reality.
What's up with Social Security's finances?
Social Security receives the bulk of its revenue from payroll taxes -- such as the money you pay into the system that comes out your paycheck regularly. But in the coming years, the program will owe a lot more in benefits than it expects to receive in tax form. That's because baby boomers are exiting the workforce in masses, and newer workers aren't coming in quickly enough to replace them. As such, Social Security anticipates a massive shortfall.
Now the good news is that the program has trust funds it can tap to bridge the gap between what it owes and the money it collects. But those trust funds are expected to completely run dry by 2035, at which point Social Security may only have the financial capacity to pay 80% of its scheduled benefits. As such, you could be looking at a 20% reduction in the monthly income you'd otherwise be entitled to -- or possibly more, if projections shift in a less favorable direction.
Hope for the best but prepare for the worst
It's too soon to know whether Social Security cuts will actually come to be, since there's always a chance of Congress stepping in with a fix. But if you're expecting to rely on Social Security in retirement, consider this your warning that your benefits may not be as robust as you'd expect.
To compensate, boost your retirement savings while you can. Currently, you can sock away up to $6,000 a year in an IRA if you're under 50, or $7,000 if you're 50 or older. If you have access to a 401(k) plan, these limits increase to $19,500 and $26,000, respectively.
Even if maxing out one of these accounts isn't possible, saving some amount consistently will help compensate for a lower Social Security benefit down the road. Case in point: Saving $300 a month over 30 years will leave you with a $340,000 IRA or 401(k) balance, assuming your investments in that account generate an average annual 7% return, which is doable with a stock-focused portfolio.
Finally, remember that Social Security was never meant to sustain retirees by itself. Even if benefits aren't cut, they'll only replace about 40% of your former paycheck if you're an average earner. Most seniors need close to twice that amount to live comfortably, which means you should be saving independently for your golden years no matter what.