Social Security is a program that's been around for many years. And hopefully, it'll be around for many more.
But a lot of people today worry that Social Security won't be around for them once it's their turn to retire. And given the dire warnings you'll sometimes hear about Social Security's demise, it's easy to see why workers today may be concerned.
But is Social Security actually going bankrupt? Not at all. The program's worst-case financial scenario does not involve benefits going away entirely, so that's something you can take comfort in.
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Why Social Security is struggling
Social Security's primary source of funding is payroll tax revenue. But as baby boomers continue to exit the workforce in droves and claim the benefits they're entitled to, the program's financial resources are getting strained. That's because with lower birth rates, there just aren't enough younger workers to come in and replace boomers who are aging out of the labor force.
Now Social Security can keep up with scheduled benefits for about another decade by tapping its trust funds. But the expectation is that those funds will be out of money by 2034. Once that happens, benefit cuts may be on the table.
Recent projections call for benefit cuts of about 20% once Social Security's trust funds are no longer viable. So that would take the average monthly $1,907 benefit as of January 2024 down to $1,525.
Now clearly, for people who rely on their Social Security benefits for the bulk of their retirement income, cuts could be extremely detrimental. But let's also be reasonable. Social Security cuts are a far cry from the program going bankrupt and disappearing completely. So it's important to make that distinction.
Save for retirement while you can
Even if Social Security benefits aren't cut, you should not expect them to replace anything close to your full pre-retirement paycheck. So it's a good idea to save independently for your senior years -- especially knowing that benefit cuts are indeed on the table.
The good news, though, is that you don't necessarily need to part with 30% of your paycheck to build up a nice nest egg. Say you earn $60,000 a year. If you were to sock away 10% of that salary, or $6,000 a year, over a 30-year period, you'd end up with a nest egg worth about $680,000.
Now this assumes that you invest heavily in stocks and score an average annual 8% return on your investments during that 30-year window. But since 8% is actually a bit below the stock market's average, it's a reasonable return to work with.
All told, the more money you're able to save for retirement, the less problematic Social Security cuts are apt to be for you. And if you have a year when, say, you face a number of unplanned expenses and aren't able to fund a retirement plan, try not to sweat it. Remember, Social Security will be around for your senior years in some shape or form. You just may not end up getting 100% of the monthly benefits you'd normally be entitled to.
