For years, there have been rumors that Social Security is on the brink of bankruptcy. Thankfully, things aren't quite that dire.
Social Security cannot go broke and run out of money because it's primarily funded by payroll taxes. This means that as long as people continue to work and pay into the program, Social Security can continue to pay benefits in some shape or form.
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However, the latest report by the Social Security Trustees makes it abundantly clear that benefit cuts may soon be on the table. In the coming years, Social Security won't collect enough payroll tax revenue to keep up with its financial obligations due to a shrinking workforce.
It can tap its trust funds to keep up with benefits, but once those funds are depleted, Social Security may have to implement cuts. And with the program's combined trust funds set to run out of money in 2034, the time to accept the possibility of benefit cuts -- and plan for them -- is now.
If you're still working, that means boosting contributions to your 401(k) or IRA so you have more personal savings to rely on for retirement. But if you're already retired, you'll need to take a different approach.
Here are a few things to do now to cope with potential Social Security cuts.
1. Assess your spending, and try to reduce your expenses
You may think you're living a pretty frugal lifestyle already if you get most of your retirement income from Social Security. But if you take a close look at your spending, you may find that there are small but meaningful opportunities to cut back on expenses and bank a little savings.
That could mean more carefully reviewing your Medicare options each year to find a lower-cost plan. Or, it could mean canceling a few services or subscriptions you don't use as much as you once did. It could help to set up an actual budget so you're aware of how you spend every retirement dollar that comes in.
2. See if you can get some type of job -- even if it's not a traditional one
If you've been out of the labor force for a while, going back to work might seem daunting. And depending on your health and physical condition, it may be difficult to take a traditional job, even if it's only part-time.
Since Social Security cuts aren't happening tomorrow, you have some time to explore your options. Maybe there's a part-time job you can do that isn't too physically demanding and puts a little money in your pocket. Or maybe you'll have success in the gig economy. It pays to see what's out there if you're worried that a reduction in your Social Security checks will leave you unable to pay your bills.
3. Look into downsizing and converting home equity to income
If you don't have much in the way of retirement savings, your home might be your most valuable financial asset at this stage of life. Downsizing and pocketing the equity could make it possible to withstand a hit to your Social Security.
Imagine your home is paid off in full and worth $300,000. If you're able to find a replacement home that's smaller for $200,000, that's $100,000 of equity you can walk away with, minus the costs associated with selling a home. It could be enough to provide you with a cushion so you're able to cope with reduced Social Security benefits.
Plus, if you downsize into a smaller home, you might pay less in the form of property taxes, insurance, maintenance, and utilities. That, too, could help you manage a reduction to your Social Security checks.
It's not a given that Social Security will be cutting benefits once its trust funds run out of money. Lawmakers have some options they can explore to prevent that unwanted scenario. But it's important to brace for Social Security cuts regardless, and to immediately start taking steps to conserve funds in case your monthly checks shrink down the line.
