Millions of seniors rely on Social Security as a primary source of income, but the program is facing some fiscal challenges that could result in an extreme reduction in benefits if those issues are left unaddressed. The crux of the matter is this: In the coming years, Social Security expects to owe more money in benefits than it collects in revenue. The reason? Baby boomers will be leaving the workforce in short order as they age and start drawing on their benefits, while a smaller, inadequate number of younger workers will be coming in to replace them.

Now the good news is that Social Security has trust funds it can tap to bridge the gap between the benefits it's scheduled to pay and the revenue it has coming in. But once those trust funds run out of money, benefit cuts will be on the table. And unfortunately, that milestone may be coming sooner than anyone would like.

Loose stack of Social Security cards

Image source: Getty Images.

When will Social Security's trust funds run dry?

In April, the Social Security Trustees released their annual report, and in it, they shared some sobering news: Social Security's trust funds will likely be depleted by 2035. Once that happens, seniors could face a benefit cut in excess of 20%.

But the news gets a bit worse. Recently, the non-partisan Committee for a Responsible Federal Budget released its own projections as to when Social Security's trust funds will run out of money, and it landed on 2031. That's four years earlier than what the Social Security Trustees predicted just months ago, and it means seniors may see their income slashed much sooner than expected.

Why the stark difference? When the Social Security Trustees released their report, the COVID-19 crisis had only just begun. Now, months later, it's clear that lost revenue from widespread unemployment is wreaking serious havoc on Social Security, since the program gets the bulk of its income from payroll taxes -- the same taxes a lot of workers and employers haven't been paying in recent months.

Seniors need to prepare

Though Social Security is not in danger of going away completely, seniors who rely heavily on their benefits need to brace for a potential hit to their income -- and prepare to adjust their lifestyles accordingly. That could mean downsizing their homes or relocating to a part of the country where that money can go further.

Current workers, meanwhile, can compensate for lower benefits by ramping up on the retirement savings front. Socking away $400 a month in an IRA or 401(k) over 30 years could result in a $453,000 nest egg, assuming that money is invested at an average annual 7% return, which is a few percentage points below the stock market's average. And near-retirees can consider working longer to pad their savings, as well as grow their Social Security benefits by delaying them past full retirement age.

While Social Security's financial woes pre-date COVID-19, the pandemic has surely made things worse. Current and future retirees need to gear up for benefit cuts, and make plans to compensate for them.