Many people would not be able to survive financially in retirement without Social Security. For those who enter their senior years without much or any savings, those monthly benefit payments can be a true lifeline.
But given the number of Americans who rely so heavily on Social Security to make ends meet, the rumors that keep swirling about the program's demise aren't exactly great news. And they may be a huge source of stress for you.
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Thankfully, Social Security is not in danger of going away completely. However, the program is facing a serious financial shortfall that everyone should know about -- and that extends to current retirees and workers alike.
The latest Social Security update isn't good
Each year, the Social Security Trustees release a report about the state of the program's finances. This year's report indicated that Social Security's Old-Age and Survivors Insurance (OASI) trust fund, which is used to pay benefits to retired workers, is expected to run out of money by 2033.
Once that happens, Social Security recipients could be looking at a 23% benefit cut. And future recipients could be looking at smaller benefits, too.
To be clear, though, the depletion of the OASI trust fund won't spell the end of Social Security. The program can't go completely broke because it gets the bulk of its revenue from payroll taxes.
The reason the depletion of the OASI trust fund is significant is that in the coming years, Social Security's estimated payroll tax revenue won't be sufficient in covering scheduled benefits. But because those payroll taxes will continue to be collected, the program won't disappear. Rather, the worst-case scenario is that benefits won't be payable in full.
Can Social Security cuts still be prevented?
Social Security cuts aren't a given. The above scenario outlines what could happen, based on recent Trustee projects, if lawmakers do nothing to address Social Security's impending financial shortfall.
However, if lawmakers step in and find a way to drive more revenue into Social Security, benefit cuts may be either completely or partially preventable. In other words, cuts could still happen, but perhaps to a less devastating degree than 23%.
The problem, of course, is that many of the solutions that have been floated to prevent Social Security cuts aren't desirable. Raising the payroll tax rate could give Social Security the money it needs to continue paying benefits in full.
But that would come at the cost of workers' losing more of their income and seeing their near-term paychecks shrink. Given how so many people are already living paycheck to paycheck in the wake of rampant inflation, this doesn't seem like an optimal solution.
There's also been talk of raising full retirement age for Social Security purposes. It's currently 67 for people born in 1960 or later, but moving it up to 69 could help Social Security conserve funds.
This change, however, might force millions of people to work longer than they want. It could also force more people to inevitably claim Social Security ahead of full retirement age, reducing their monthly benefits in the process.
All told, there are ways to avoid Social Security cuts, but they're very much imperfect. For this reason, retirees and workers alike should brace for a broad reduction in benefits and prepare by cutting spending and boosting savings where possible.
While Social Security isn't doomed completely, the program's finances just don't look good. And while it's OK to stay positive, it's important to face that reality.
