Millions of seniors today collect a monthly benefit from Social Security. And without that income, a lot of retirees would no doubt be plunged into poverty.
But while Social Security is paying seniors steadily now, will that be the case in the future? Or is it time to kiss those retirement benefits goodbye?
Social Security is here to stay
Let's cut to the chase. You may have heard rumors that Social Security is on the verge of bankruptcy, and that it won't be around for your retirement. But that's just not true. To see why, you need to understand where Social Security gets its funding from.
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The bulk of Social Security's revenue comes in the form of payroll taxes -- the ones workers often complain about having to pay. Because of this, Social Security can't go completely bankrupt as long as the U.S. has an active labor force.
So then why all the doom and gloom? It boils down to a major labor force shift that's already happening, and is expected to keep happening.
The pandemic pushed a lot of older workers into early retirement. But the reality is that in the coming years, baby boomers will be reaching retirement age and will want to make a clean workforce exit after having put in their time.
The problem, though, is that younger workers aren't expected to replace retiring older ones at a fast enough pace. So as baby boomers continue to retire in droves, Social Security will face a double whammy. It will lose out on a large chunk of payroll tax revenue, and it will also be forced to start paying out on more benefit claims.
The good news is that Social Security has cash reserves, known as its trust funds, that it can tap to make up that revenue shortfall -- but only for a while. Those trust funds could be depleted in a little more than 10 years. Once that happens, significant Social Security cuts could end up on the table.
Prepare for smaller benefits, but benefits nonetheless
Social Security may only be able to pay 77% of scheduled benefits once its trust funds run dry. But 77% of your projected monthly benefit is still better than not getting to collect any benefit at all.
As such, there's really no need to write off Social Security as a viable retirement income source. The program is not in danger of disappearing completely, and it might still serve as a key means of paying your bills once your career wraps up.
That said, it's important to face the reality of benefit cuts and boost your personal savings to compensate for them. That could mean ramping up your IRA or 401(k) plan contribution rate by 1%, 2%, 5%, or more, depending on what you're currently saving.
In fact, even if Social Security benefits aren't cut, they still shouldn't be your only source of retirement income. The more of an effort you make to build yourself a solid nest egg, the more financially stable your retirement is likely to be.
