Millions of seniors today rely on Social Security as a critical source of retirement income. And chances are, many future retirees will depend heavily on those benefits as well.
But Social Security is facing its share of financial challenges that could have devastating consequences for current and future retirees alike. And if lawmakers don't intervene, the results could be downright catastrophic.
There's a serious revenue shortfall at play
Social Security primarily relies on payroll taxes (the ones we all hate paying) to stay afloat. But in the coming years, that income stream is expected to shrink. That's because baby boomers are expected to exit the workforce in droves, and it's anticipated that the number of workers entering the labor force won't suffice in replacing retired boomers.
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Meanwhile, as baby boomers retire, they're also likely to start claiming the benefits they're entitled to, putting a lot of strain on Social Security's resources. And once the program's cash reserves, known as its trust funds, run dry, Social Security may have no choice but to implement universal benefit cuts.
In their most recent report, the Social Security Trustees estimated that the program's trust funds will be depleted by 2034. But we can't rule out the possibility of that timeline being pushed up due to the pandemic.
First of all, many people were unemployed on a long-term basis during 2020 and 2021, thereby limiting the amount of payroll tax going into Social Security. Furthermore, we don't know to what extent the pandemic will end up driving people into early retirement.
On the one hand, the popularity of remote work might drive some older employees to extend their careers. On the other hand, the emotional toll of the crisis could spark an early retirement trend as a "seize the day" sort of thing.
All told, Social Security has a very real fiscal crisis on its hands. And the worst part? Lawmakers have known about it for years.
Granted, no one could've predicted the extreme impact the COVID-19 pandemic would have on the U.S. economy. But Social Security's financial woes predate the pandemic by many years. And at this point, we're inching closer and closer to the point when benefit cuts could become a real possibility.
Can Social Security be saved?
To be clear, Social Security isn't going bankrupt, and as of now, the worst-case scenario involves benefit cuts -- not a dissolution of the program itself. But significant benefit reductions are apt to be a huge problem for the millions of seniors who get most or all of their income from Social Security.
As it is, many beneficiaries today are struggling to make ends meet. Take away what could be 20% of their retirement income or more, and we're talking about a widespread financial crisis.
Current workers have an opportunity to avoid a serious financial shortfall in retirement by socking funds away in an IRA or 401(k) plan. But that's not an option existing retirees have. And so we have to hope that lawmakers will get moving on a solution to address Social Security's financial issues -- before that doomsday clock ticks down.
