The Social Security Trustees release a report every year on the financial health of the program. Unfortunately, this-year's report contained some unfavorable news.
Social Security's trust funds are now expected to run dry in 2034. That's a year earlier than the Trustees predicted last year.
Once the program's trust funds are depleted, benefit cuts may be on the table. As of now, Social Security recipients are looking at cuts to the tune of 20%. Ouch.
Image source: Getty Images.
Clearly, that's not the sort of news to take lightly. But it's also not necessarily a reason to panic.
1. Lawmakers may not allow cuts to happen
Lawmakers have a lot to lose by letting Social Security slash benefits. Right now, millions of Americans consider those benefits their primary source of income. If they were to be slashed substantially, it would no doubt spur a poverty crisis among the elderly.
As such, lawmakers have different options for addressing Social Security's financial woes. These include raising the full retirement age for Social Security purposes, imposing taxes on higher levels of income, or increasing the rate of tax all workers pay into Social Security.
2. Benefit cuts could end up being smaller than currently projected
Right now, it's looking like Social Security may have to slash benefits by 20%. But that figure could change over time -- and become less extreme.
Granted, for current Social Security recipients, benefit cuts of any degree might be detrimental. But if lawmakers are able to limit those cuts to, say, 10%, the damage shouldn't be as severe.
3. You can compensate for benefit cuts by building a really strong nest egg
If you're currently retired and mostly living on Social Security, it's too late to go back in time and build yourself a larger nest egg (though you may be able to compensate for Social Security cuts by going out and getting a job). But if you're still working and retirement isn't so near, you have ample opportunity to make up for future benefit cuts by boosting your personal savings.
Let's imagine you're currently contributing $250 a month to a 401(k) plan and have a balance of $20,000. Let's also assume you're still 30 years away from retirement. If you were to cut back on spending and double your monthly contributions to $500 apiece over the next three decades, you'd end up with a 401(k) balance of over $880,000, assuming your investments deliver an average annual 8% return (which is a bit below the stock market's average).
The idea of Social Security cuts can be daunting. And clearly, it's something current and future retirees don't want. But before you panic over the idea of having to forgo a chunk of your benefits, recognize that lawmakers have a lot to lose by letting those cuts happen or happen to such an extreme degree. If you have time on your side, there's lots of opportunity to build more savings so you become less reliant on Social Security once your time in the workforce comes to an end.
