Years ago, it was common for people to work for the same company for decades, retire eventually, and collect a pension that gave them guaranteed income for the rest of their lives. Those days are long gone, though, at least within the private sector.
Now, pensions are a rarity, and most people who want retirement income outside of Social Security have to save it up themselves. That's easier said than done, given how much money it costs to function comfortably in society.
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For this reason, a lot of workers today risk entering retirement with almost non-existent nest eggs. Many current retirees are living on little to no savings, too.
For people in this boat, Social Security benefits are crucial. And millions of older Americans rely on those benefits today to stay afloat.
Unfortunately, though, Social Security is facing the real possibility of benefit cuts -- and those cuts may be coming sooner than you'd expect.
Why Social Security is looking at benefit cuts
You've probably heard that Social Security may have to cut benefits. But if you want to know the reason why, it boils down to a funding shortfall.
Social Security's main funding source is payroll taxes. But as baby boomers exit the workforce, that revenue source is going to shrink. At the same time, boomers will inevitably start claiming the Social Security benefits they're entitled to, putting a strain on the system.
Social Security has trust funds it can tap to keep up with its financial obligations as its revenue shrinks. But once those trust funds run out of money, Social Security may have to cut benefits in the absence of adequate funding.
The clock is ticking down
The Social Security Trustees put out a report every year that shares details of Social Security's finances. In its most recent report, it said that Social Security's combined trust funds are likely to be depleted in 2035.
Based on that information, current recipients could be looking at benefit cuts in about a decade from now, and future recipients may not get their Social Security benefits in full.
It's not a given that Social Security benefits will be broadly reduced. Lawmakers do have options to try to prevent that unwanted scenario. The problem is that each potential solution to benefit cuts introduces its own set of drawbacks.
Some lawmakers, for example, have proposed raising taxes to pump more money into Social Security. But the problem there is obvious.
Many working Americans are already struggling to make ends meet. Burdening them with additional taxes doesn't sound like a great thing to do.
Other lawmakers, meanwhile, have proposed raising full retirement age, which is when workers can get their Social Security benefits without a reduction. That age is currently 67 for anyone born in or after 1960.
The problem with pushing that age back, though, is that it effectively forces workers into a longer retirement -- when that's even an option. As it is, some people struggle to stay in the labor force until 67 due to health issues or age discrimination. Delaying full retirement age only compounds these issues.
For this reason, it's important to prepare for Social Security cuts, even though they aren't set in stone. For current retirees, that could mean cutting spending and turning to the gig economy or part-time work for income. For current workers, it means prioritizing savings, despite that being a tough thing to do.
But no matter which category you fall into, the time to start getting ready for Social Security cuts is now.
