If you read the latest Social Security Trustees Report, you may be inclined to curl up in a ball, bemoaning the fact that your retirement may have just gotten a lot more complicated.
In the coming years, Social Security is expected to see its primary revenue source -- payroll taxes -- take a major hit. The reason isn't due to a change in any laws, but rather, the anticipated mass exodus of older workers who will be reaching retirement age in the coming years.
But Social Security's financial picture isn't all bad. So before you start worrying that you won't be in line for any retirement benefits, realize that scenario just isn't on the table.
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Benefits will not go away completely
In the coming years, Social Security is expected to owe more in benefits than it collects in payroll tax revenue. But that doesn't mean benefits are disappearing.
Right now, the worst-case scenario has those benefits shrinking to some degree. The latest estimate from the Social Security Trustees is 17%, which means current and future retirees can still anticipate being able to collect the majority of the benefits they're in line for.
In fact, Social Security can't go away completely because as long as there's a labor force, the program will continue to get funding. So even if the extent to which benefits may be cut changes for the worse in the coming years, Social Security should still be in a position to continue to pay seniors something. And something is better than nothing.
Benefit cuts may not even happen
The other piece of this puzzle is that while Social Security cuts are a possibility, given the program's financial circumstances, they're definitely not a given. This isn't the first time in Social Security's history that benefit cuts have been on the table due to a financial shortcoming. But in the past, lawmakers have always managed to avoid a broad reduction in payments.
At this point, the Social Security Trustees are projecting that benefit cuts may become necessary in 2035, the year during which the program's combined trust funds are expected to run dry. This gives lawmakers more than a decade to come up with a way to prevent benefit cuts.
And while they certainly shouldn't dilly-dally, those cuts are not exactly right around the corner. That should allow for ample time to fashion a solution -- if lawmakers get moving in short order.
Know the facts, but prepare regardless
The idea of paying into Social Security year after year only to not receive any benefits in return is beyond upsetting. So you can rest assured that this isn't the situation at hand. And you can also take some comfort in the fact that lawmakers have never allowed Social Security cuts to happen in the history of the program, so hopefully, they'll jump in with a solution to avoid them this time around.
But still, it's a good idea to prepare for a reduced Social Security benefit throughout your retirement -- just in case. And there are several ways to go about that.
First, save, and keep saving. If retirement is 20 years away and you're able to contribute $500 monthly to a 401(k) or IRA, you'll wind up with about $275,000 to your name, assuming an average annual 8% return out of your portfolio. That return is a notch below the stock market's average.
Next, rethink some retirement plans. Perhaps owning the larger home you raised your family in isn't necessary if it comes with a $7,500 annual property tax bill. Adjusting your spending could help accommodate a smaller Social Security check, should that become necessary.
Finally, consider continuing to work in retirement. Doing so could not only put extra cash in your pocket, but also help alleviate boredom -- something that's fairly common among retirees. Thanks to the gig economy, work has gotten more flexible than ever, so you may find that a job fits pretty seamlessly into your retirement plans.
All told, Social Security's financial situation isn't totally bleak. Sure, things could be better. But at the end of the day, you can rest assured that the worst-case scenario right now is benefit cuts -- if those even happen.
