Workers are advised to be diligent about saving for retirement for one big reason: Retiring on Social Security alone could result in a world of financial hardship.
Social Security will only replace about 40% of the average-worker's pre-retirement wages. And most seniors need a lot more money than that to live comfortably.
But that 40% figure may not hold true for much longer. Social Security is facing a serious financial shortfall that could force it to cut benefits as early as 2035. And as we inch closer to that unwanted milestone, it should be a wake-up call for savers and lawmakers alike.
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A revenue crisis looms
Social Security gets the bulk of its revenue from payroll taxes. But that revenue stream is expected to shrink in the coming years as baby boomers exit the workforce in droves and not enough workers come in to replace them.
Not only is a mass baby boomer workforce exodus expected in the coming years, but once those boomers retire, they're apt to start signing up to receive the Social Security benefits they're entitled to. So all told, the program is facing a scenario where it will owe more money in benefits than it takes in.
Social Security can tap its trust funds to make up for that shortfall. But once the program's cash reserves run dry, Social Security may have no choice but to slash benefits.
Meanwhile, the most recent Social Security Trustees report estimated that the program's trust funds are expected to run out of money by 2035. There's wiggle room with that date, and that milestone could be pushed out a few years -- or pushed forward, depending on economic conditions. But either way, Social Security cuts are a real possibility -- and they may be happening sooner than anyone wants.
Avoiding a financial crunch
It may be a bit late for current retirees to compensate for Social Security cuts since many haven't worked in years and aren't well-positioned to return to a job to boost their income or savings. Plus, some retirees might have health issues that make it difficult, if not impossible, to hold down a job. As such, seniors who get the bulk of their income from Social Security could, unfortunately, be in for a world of upheaval if benefits are reduced.
But current workers have an opportunity to make up for potential Social Security cuts by boosting their savings efforts. Increasing IRA or 401(k) contributions could go a long way toward preventing a personal financial shortfall for a lot of people.
It's scary to think about the idea of Social Security cutting benefits in the not-so-distant future, but it's also the reality we're looking at. The sooner today's workers realize that, the better they can prepare.
At the same time, let's hope lawmakers recognize the need to work through solutions that address Social Security's funding shortfall. Preventing benefit cuts could mean avoiding a massive poverty crisis among the elderly, and that's something lawmakers should absolutely be invested in.
