Will Social Security be around for your retirement? Despite the rumors, the answer is almost assuredly yes.
But that doesn't mean you should fall back on Social Security and deprioritize your savings. Quite the contrary -- you'll probably get a lot less money from Social Security than you think, even if the program sticks around for the long haul.
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Benefit cuts are a distinct possibility
Anyone who's in the process of planning for retirement should take some comfort in the fact that Social Security is not on the verge of going bankrupt and disappearing. But the program is facing some huge financial challenges.
In the coming years, Social Security expects to owe more in benefits than it collects in revenue. And a big reason is that the program's primary revenue source is payroll taxes.
Thanks to an anticipated mass exodus of baby boomers from the workforce, Social Security's payroll tax revenue stream is looking like it's going to shrink. And while it can tap its trust funds to keep up with scheduled benefits for a limited period of time in light of that, once those trust funds run dry, benefit cuts will be on the table.
But those trust funds could be out of money in a little over 10 years. That means Social Security could cut benefits in a little over 10 years -- and it's something you'll need to account for as you plan for retirement.
Your benefits might fall short even without cuts
It's in lawmakers' best interest to avoid Social Security cuts. Many retirees today get the bulk of their income from those benefits. For some, Social Security is their only source of income. So if benefits were to get reduced universally, it would no doubt spur a poverty crisis among the elderly. And that's something the government would likely have to pay for in other ways.
All told, it's reasonable to assume that lawmakers might manage to avoid Social Security cuts, whether by imposing extra taxes on higher earners or changing the rules of the program itself. There are different possibilities being explored. But even if you end up collecting every dollar from Social Security you're supposed to, you should know that your benefits will most likely only replace about 40% of the wages you're used to living on.
Of course, that assumes you're an average earner. If you're a higher earner, you can expect even less replacement income from Social Security. But in light of that, it's important to not rely too heavily on Social Security -- even if lawmakers announce a major change that could shore up the program's finances.
There's really no danger of Social Security going away completely in your lifetime. But that's not a reason to put building your own nest egg on the back burner. Benefit cuts are more than possible, and even your full benefits may not be enough to sustain you in retirement the way you'd like. The sooner you recognize that, the sooner you may be inclined to prioritize your IRA or 401(k).
