Millions of seniors collect Social Security, and for many, those benefits are their primary source of retirement income. But Social Security's finances have long been rocky, and the COVID-19 pandemic has only made an already dire situation even worse.
Social Security's main source of revenue is payroll taxes -- the taxes workers and employers pay on wages. This year, due to unprecedented levels of unemployment, Social Security is collecting less revenue than it initially expected to. And that's a bad thing, because that lack of revenue might force the program to start depleting its trust funds sooner than planned. Once those trust funds run out of money, major benefit cuts may be on the table.
It's not shocking, then, to learn that 61% of Americans say they're now more worried than ever about Social Security running out of money down the line, according to a new Nationwide survey. But while that's a very valid concern, the good news is that, despite the program's financial shortcomings, Social Security is actually in no danger of going away completely.
What's in store for Social Security?
Workers who pay into Social Security their entire lives want to make sure they're entitled to benefits once they retire -- and that makes sense. Thankfully, workers of all ages today stand to collect some amount of money from Social Security once they retire. Whether they're able to get their full scheduled benefits, however, is up for debate.
Once Social Security depletes its trust funds, recipients are at risk of losing a large chunk of their benefits to across-the-board cuts. But that assumes lawmakers aren't able to intervene with a fix.
A number of solutions have already been floated in an effort to avoid a scenario where Social Security benefits are subject to cuts. These include:
- Raising full retirement age, or the age at which seniors can collect their monthly benefit in full
- Raising the wage cap for Social Security taxes (right now, wages above $137,700 aren't subject to payroll taxes for Social Security purposes)
- Eliminating the wage cap altogether
- Implementing a means test so that Social Security benefits go to the neediest seniors
Of course, each of these suggestions has its advantages, as well as its drawbacks. The point, however, is that lawmakers are working on solutions to Social Security's fiscal woes, so there's no need to give up hope on collecting a full retirement benefit.
What's the timeline for potential benefit cuts?
Before the COVID-19 pandemic, the Social Security Trustees estimated that the program's trust funds would be out of money by 2035. In light of the pandemic, that date may arrive sooner.
While it's important for workers to brace for the possibility of reduced benefits, let's not lose sight of the bigger picture: Social Security is not in danger of running out of funding completely, and while benefit cuts are on the table, they're not a given. Still, workers today can compensate for a potential reduction in future benefits by saving aggressively for their senior years. That way, they'll be less reliant on Social Security down the line, regardless of what it actually ends up paying them.