Millions of seniors rely on Social Security to cover their expenses in the absence of other income. And it's fair to assume that many future retirees will become similarly dependent on Social Security once their careers wrap up.
It's easy to argue that retiring on Social Security alone isn't a good idea. Those benefits will only replace about 40% of an average wage earner's pre-retirement income, and most seniors need roughly twice that much money to cover their bills and live comfortably.
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But that 40% figure may no longer be valid roughly a decade from now because at that point, Social Security may be forced to slash benefits for retirees. And that has the potential to create a widespread financial crisis.
Social Security's financial prospects don't look good
In the coming years, Social Security is expected to face a major funding shortfall. The program gets the bulk of its revenue from payroll taxes. But as the labor force shrinks as baby boomers close out their careers, that stream of payroll tax revenue will no doubt follow suit. Doubling that whammy is the fact that retiring boomers will then start to file their own Social Security claims, putting a strain on the program.
Social Security does have trust funds it can raid to keep up with benefits for a bit of time. Once those trust funds run dry, though, benefit cuts will be on the table. And the timing of those trust funds being depleted isn't far off.
In their most recent report, the Social Security Trustees projected that the program's trust funds will be empty by 2034. That's a year earlier than what the Trustees called for in 2022.
Once there's no money left from Social Security's trust funds to tap, benefits could be reduced to the tune of 20%. That's a massive pay cut for current and future retirees to absorb, though.
Boosted savings could help compensate
Current retirees who are heavily dependent on Social Security are in a true bind in light of the potential for benefit cuts. After all, it's too late for them to go back in time and build larger nest eggs, and for many, work is no longer an option.
That's a problem lawmakers will have to find a way to resolve. Otherwise, they might have a mass senior poverty crisis on their hands.
Meanwhile, today's workers do have an opportunity to boost their savings rates and attempt to build up strong IRAs and 401(k)s to make up for potential Social Security cuts. And the sooner they start ramping up their savings, the better.
We've already seen the Social Security trust fund depletion date get pushed up from 2035 to 2034. We don't know what findings the program's Trustees will have next year, but it's conceivable that Social Security could burn through its cash reserves at an even faster pace than expected at present.
All told, benefit cuts would be a glaringly unwelcome change to Social Security. While they're not guaranteed, they're a possibility that current and future recipients alike will have to come to terms with.
