Millions of seniors collect monthly benefits from Social Security today -- and you may be hoping that once you're retired, you'll get to do the same.
But you may have heard that Social Security is on its way out due to a looming financial crisis. And that's apt to be concerning.
The good news is that Social Security is not, in fact, on the verge of bankruptcy. Its impending demise is really nothing more than a myth. However, Social Security is facing some financial challenges that workers and seniors alike need to plan for.
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Why Social Security can't go bankrupt
Social Security's main source of funding is payroll tax revenue, and it's for this reason that it can't go bankrupt.
As long as there's an active labor force, the program will have money coming in. But it may not be enough money to keep up with scheduled benefits in full, and that's the problem.
See, in the coming years, baby boomers will continue to exit the workforce in droves, and there will be a smaller number of people entering the workforce to replace them. That's going to lead to a revenue shortfall.
Social Security can tap its trust funds to keep up with full benefits as long as those funds have money remaining. But in about a decade's time, they're expected to run dry.
At that point, Social Security might have to cut benefits to the tune of about 20%. That's not great. But it's also a far cry from the program going bankrupt and benefits disappearing entirely.
Prepare for benefit cuts
This isn't the first time Social Security has faced the possibility of benefit cuts. In the past, lawmakers have managed to prevent them. But whether they'll be able to do that this time is questionable. So it's best to brace for a reduction in benefits and try to plan around it.
If you're still working, the solution there is simple. Save more to make up for smaller benefits down the line.
Granted, you probably can't just snap your fingers and magically make more money show up in your IRA. But you can make a point of spending carefully and judiciously to free up more money for your nest egg.
If you're already retired, you may be in a tougher spot with fewer options. But one thing you can do, if your health allows for it, is return to work in some capacity. This could allow you to build up more cash reserves so you'll have added savings to dip into if benefit cuts arrive in about 10 years.
Remember, working doesn't have to mean punching a clock and sticking to a rigid schedule. Thanks to the gig economy, returning to work could mean anything from consulting in your former field on a freelance basis to doing creative gig work, from performing to crafting.
The idea of Social Security disappearing completely is scary. But thankfully, that's not on the table. However, it's a good idea to prepare for potential benefit cuts. If you make an effort to save more and those cuts don't happen, you'll simply, at that point, have more money at your disposal. That's hardly a bad thing.
