Taxes are a part of life when you earn an income. But some of your taxes go specifically toward funding Social Security.
Meanwhile, a lot of workers are worried that after many years of paying into Social Security, they're not going to get anything out of it. That's because they may have heard the rumor that Social Security is running out of money and will be bankrupt before we know it.
Obviously, that's a concerning thought. But it's something you don't have to fear for one big reason.
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Why Social Security can't run out of money
Social Security's primary revenue source is payroll taxes. So as long as we have an active workforce full of people paying into the program, Social Security can't run out of funds completely.
That said, Social Security's future is far from rosy. The program is looking at a major revenue shortfall in the coming years as baby boomers exit the workforce in droves, and too few replacement workers enter the labor force to make up that lost payroll tax revenue.
Now thankfully, Social Security has trust funds it can tap to keep up with scheduled benefits for a good number of years. But those trust funds are expected to run dry in a little over 10 years' time. And once that happens, Social Security may have to reduce the benefits it pays to future retirees in the absence of having the funding to pay them in full.
To be clear, this doesn't mean that Social Security will have run out of money. It just means that the program will be looking at less money, and lower benefits. Think about it as a pay cut of sorts.
Let's say you're earning $100,000 at your job now, only you get laid off and are forced to take a job that only pays $75,000. It's not that you'll have run out of money completely -- it's that you'll have to make some adjustments to your spending to account for a lower paycheck. Similarly, Social Security might have to reduce benefits if its payroll tax revenue stream declines to a notable degree, which it's expected to do.
How to cope with Social Security cuts
Social Security benefit cuts may be inevitable. That's not great news, though it's far better than not receiving any benefits from Social Security at all once you retire.
But one thing you should realize is that even without benefit cuts, Social Security will generally only replace about 40% of your preretirement wages if you earn an average income. And many people end up needing a higher level of replacement income to live comfortably during their senior years.
So even if Social Security cuts weren't on the table, it's still a smart idea to build yourself a nice retirement nest egg. That way, you'll have a means of supplementing your Social Security benefits -- whether they're cut or not.
And to be clear, Social Security cuts aren't a given. Lawmakers have a lot to lose by allowing the program to simply slash benefits, as that would inevitably plunge many seniors without backup cash sources into poverty. So it's not certain that you'll be looking at a reduced benefit during your retirement, even though there's a chance that will happen.
All told, if you're working today and are worried about whether Social Security will be there for you in the future, you can rest assured that the program is not running out of money. Benefit cuts are a solid possibility, but that's a very different scenario than not being able to collect any money from Social Security after years of working hard and paying into the program.
