There's a reason so many workers today are worried about Social Security disappearing on them. The program is facing a serious financial shortfall. And if lawmakers don't take steps to address it, and soon, benefit cuts could be on the table.
But despite that possibility, Social Security is not, in fact, running out of money completely. Here's why that simply can't happen.
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Social Security's main funding source is alive and well
Social Security gets the bulk of its revenue from payroll taxes (the ones we all like to grumble about paying). So as long as we have an active workforce, the program can continue getting funded.
So why the need for benefit cuts? The reason is that baby boomers are expected to exit the workforce in droves in the coming years. And while younger workers will surely come in to take their place, they're not expected to do so at a rapid enough pace.
As such, Social Security is looking at a reduction in revenue. To compensate, it will need to tap its trust funds to keep up with scheduled benefits. Once those trust funds run dry, though, benefit cuts may have to happen. And those trust funds may be out of money in just a little more than a decade from now.
To be clear, though, there's a world of difference between benefit cuts and Social Security disappearing completely. The latter is not a scenario that's on the table in any shape or form. But even with that in mind, you still don't want to rely too heavily on Social Security for one big reason.
Those benefits won't sustain you -- even without cuts
While you should expect to receive income from Social Security in retirement, the reality is that those benefits -- even without cuts -- will only replace about 40% of your preretirement wages if you're an average earner. And most seniors need a lot more money than that to live comfortably. So either way, don't bank too heavily on Social Security, and make sure you take savings matters into your own hands.
Inflation has been straining a lot of people's budgets, so it may be a struggle to fund your retirement savings. But if you can manage to sock away $300 a month in an IRA or 401(k) over the next 30 years and you invest that money at an 8% average annual return, which is a bit below the stock market's average, you'll end up with a nest egg worth about $408,000. Make it $350 a month, and you're looking at more like $476,000.
All told, you don't have to worry that Social Security is completely running out of money. The program will still be able to pay you some sort of benefit once you retire. But that benefit may be smaller than anticipated due to universal cuts. And even if those don't come down the pike, retiring on Social Security alone might lead to a world of financial struggles. Saving for retirement could help you avoid that unwanted scenario.
