Social Security benefits are an integral source of income for millions of retirees, so it pays to understand as much as possible about how the program works.
There are some misconceptions about Social Security that could potentially affect your retirement plans, and there's one thing many people get wrong about the program's future -- especially when it comes to benefit cuts.
How stable is Social Security really?
One of the most common misconceptions about Social Security is that it's going bankrupt. While it is true that the program is on shaky ground, the situation isn't as dire as many people believe.
Social Security benefits are funded primarily by payroll taxes. Workers pay into the program through taxes, and that money goes out to retirees as benefits.
However, with baby boomers retiring in droves and older adults living longer lifespans, Social Security has been sending out more money in benefits than it's receiving from taxes. As a result, the program has been facing a cash shortage, and it's been dipping into its trust funds to cover the deficit.
According to the latest estimates from the Social Security Administration Board of Trustees, those trust funds will likely be depleted by 2034. At that point, there will only be enough money coming in from taxes to cover around 77% of projected benefits.
The bad news is that this means benefits could potentially be cut by 23% by 2034 if lawmakers don't find a solution before then. However, this doesn't mean Social Security is going bankrupt. As long as workers continue paying payroll taxes, there will always be at least some money to pay out in benefits.
Social Security is now facing a different problem
Social Security isn't going away anytime soon, and retirees will be able to rely on their benefits for at least a portion of their income. However, there's another issue the program is facing: inflation.
Despite annual cost-of-living adjustments (COLAs) designed to help Social Security keep up with inflation, benefits have still been losing buying power. This year, for example, seniors received a massive 5.9% COLA to help combat inflation -- yet the real inflation rate has soared by more than 9% over the past year.
This isn't a recent problem, either. In fact, Social Security has lost roughly 40% of its buying power since 2000, according to a 2022 report from The Senior Citizens League. Your benefits won't go as far as they used to, and if this problem worsens, they may be even less reliable in the future.
What does this mean for your retirement?
Perhaps the best thing you can do to prepare is to simply keep realistic expectations about Social Security. The program isn't going away, but it's also not as dependable as it used to be. If you're expecting your monthly payments to make up a significant portion of your income, you may need a backup plan.
You'll still be able to rely on your benefits to some degree. However, it's wise to have a robust retirement fund to fall back on in case your monthly checks don't go as far as you expect.