There's a world of misinformation surrounding Social Security, and sometimes, it can be tricky to know what to believe. For example, you may have heard that Social Security is in deep financial trouble, and that future benefits are therefore precarious. As such, you may be wondering if it's time to write off Social Security as a retirement income source. Here's what you need to know.
Benefit cuts are possible
In the coming years, Social Security expects to owe more money in benefits than it collects in revenue. The reason for this is that baby boomers are expected to exit the workforce in short order, and an inadequate number of workers will come in to take their place.
Social Security gets most of its funding from payroll taxes. That's why that mass exit of baby boomers is so problematic for its finances. And while the program does have trust funds it can take money from to keep up with scheduled benefits, once those trust funds run dry, benefit cuts may be on the table.
Unfortunately, the program's trust funds could run out in about 10 years or so if recent projections are correct. That would make benefit cuts not a far-off possibility, but a near-term one.
Is Social Security going away?
While future retirees may need to grapple with Social Security benefit cuts, that's a far cry from the program's funding drying up completely. The latter scenario isn't a concern right now, and so there's no need to operate under the assumption that Social Security won't pay you any money in retirement.
That said, even if benefits aren't cut, the money you receive from Social Security will generally only be enough to replace about 40% of your pre-retirement paycheck -- and that's if you're an average earner. If you're a higher earner, those benefits will replace even less income.
That's why it's so important to build a retirement nest egg -- not because Social Security is actually going away, but because even if those benefits aren't cut, you'll still need outside income to manage well once you stop working. And if benefits are indeed cut, you'll need independent savings even more.
The good news, though, is that if retirement is many years away, you have plenty of opportunity to build a solid amount of wealth. Socking away $400 a month in an IRA or 401(k) plan, for example, will leave you with over $1.2 million after 40 years if your invested savings generate an average annual 8% return, which is a bit below the stock market's average.
Know what you're up against
There's no reason to think Social Security won't pay you any money at all once you retire. But should you have another income source outside of it? Absolutely. This holds true regardless of whether benefits are actually cut or not.
And to be clear, benefit cuts are a scenario lawmakers want to avoid, so they may come up with a solution to the program's financial woes between now and when its trust funds are set to run out. What that solution will entail, however, is anyone's guess.