If you're expecting Social Security to be a significant source of income in retirement, you're not alone. A whopping 88% of current retirees say they rely on their benefits, according to a 2024 poll from Gallup, with 60% of that group saying their checks are a major income source.
However, Social Security is facing some major challenges that could pose problems for retirees. The program isn't as reliable as it once was, and the situation may worsen in the coming years.
Between potential benefit cuts on the horizon and a serious loss of buying power, relying too heavily on Social Security could put your retirement at risk.
Image source: Getty Images.
Cuts could be looming
While Social Security isn't going bankrupt, it is experiencing cash flow issues that could result in benefit cuts in the next decade or so.
The program relies primarily on payroll taxes to fund benefits. Workers pay into Social Security through taxes, and that money is paid out to current beneficiaries. But the program has been receiving less in income than it's paying out in benefits, resulting in a cash shortfall.
To bridge the gap and avoid cuts for right now, the Social Security Administration has been pulling money from its trust funds -- the Old-Age and Survivors Insurance (OASI) fund and the Disability Insurance (DI) fund. Those funds won't last forever, though, and according to the Social Security Administration's latest estimates, they're predicted to be depleted by 2035.
Once both funds run out, the program's income sources will only be enough to cover around 83% of scheduled benefits. In other words, benefits could potentially be slashed by around 17% by 2035.
There is a good chance that lawmakers will find some sort of solution before then. But even some of those solutions could still affect retirees -- such as raising the full retirement age or reducing benefits for high earners. It may be wise, then, to start preparing for smaller checks just in case.
Benefits are losing buying power
Another serious problem plaguing Social Security is its loss of buying power over the years. Despite annual cost-of-living adjustments (COLAs), benefits have consistently failed to keep up with rising inflation.
Even record-breaking COLAs haven't been enough to combat inflated costs. In 2023, Social Security beneficiaries received an 8.7% adjustment -- the highest in four decades. Yet just six months prior, in June 2022, inflation peaked at 9.1%.
Over time, these shortcomings add up. In fact, benefits have lost 36% of their buying power since 2000, according to a 2023 study from nonprofit group The Senior Citizens League. The study also revealed that to maintain the same buying power as in 2000, beneficiaries would need an extra $516.70 per month.
The average retired worker collects roughly $1,900 per month in benefits, according to 2024 data from the Social Security Administration. Even an 8.7% COLA only amounts to around $165 more per month, and it's unlikely we'll see adjustments like that again anytime soon. To collect the extra $516 per month necessary to maintain buying power, a retiree earning $1,900 per month in benefits would need a COLA of roughly 27%.
In other words, benefits are rapidly losing buying power, and even higher-than-average COLAs probably won't fix the problem. Coupled with potential cuts by 2035, when the trust funds are expected to run out, retirees relying heavily on Social Security could be hit especially hard.
What can you do right now?
If you're already retired and have few or no other sources of income outside of Social Security, there may not be much you can do -- other than do your best to save what you can to build some sort of nest egg.
But if you still have some time before retirement, now is your best opportunity to reduce your dependence on your benefits. That could mean increasing your savings to build a stronger retirement fund, for example, or perhaps picking up a source of passive income.
You could also consider delaying claiming benefits to earn larger checks. The average benefit amount at age 70 is around $2,038 per month, according to the Social Security Administration. Meanwhile, the average payment at age 62 is just $1,298 per month -- a difference of roughly $740 per month. If benefits face cuts or continued loss of buying power, that extra cash can go a long way.
Social Security can be a lifeline in retirement, but depending on it too much could put your finances at risk. By taking steps now to build a more financially secure retirement, you can protect yourself no matter what the future has in store for Social Security.
