Social Security is a lifeline for many retirees, with some relying on their benefits as their primary or even sole source of retirement income.
Unfortunately, the program isn't as reliable as it once was. With two significant problems plaguing Social Security, retirees and soon-to-be retirees may need a backup plan to secure their financial futures. Here's what you need to know.
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Benefit cuts are on the table
Social Security is funded primarily through payroll taxes. Workers pay into the system through taxes, and that money is then funneled to current beneficiaries.
The problem, however, is that Social Security is paying out more than it's bringing in. This is partly due to baby boomers retiring in droves, requiring the Social Security Administration to distribute more in benefits. But declining birth rates and immigration rates also mean there are fewer workers contributing to Social Security.
To bridge the gap between what it's receiving in income and what it has to pay out in benefits, the Social Security Administration has been dipping into its two trust funds. This has ensured that beneficiaries continue to receive their full payments, despite the program running at a deficit.
However, these trust funds won't last forever. According to the most recent estimates from the Social Security Administration Board of Trustees, both trust funds are expected to run out by 2034. If nothing changes by then, the program may only have enough income to pay out around 81% of scheduled benefits.
In other words, unless lawmakers find a solution to the deficit soon, benefits could be cut by nearly 20% by 2034.
Social Security is losing buying power
The other major challenge Social Security is facing is its dwindling buying power. While annual cost-of-living adjustments (COLAs) are intended to help benefits keep up with rising costs, they haven't been particularly effective.
Part of this may be because of how the COLA is calculated. It's based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks the buying habits of workers. Retirees often have different spending patterns than workers, so the CPI-W doesn't always reflect how rising costs affect seniors.
Between 2010 and 2024, Social Security lost an estimated 20% of its buying power, according to research from nonpartisan advocacy group The Senior Citizens League. The average benefit in 2024 was around $1,860 per month, the report found, when it should have been around $2,230 per month if benefits had maintained their buying power.
Coupled with potential benefit cuts in the coming decade, the loss of buying power can make it even more challenging for retirees to depend on their benefits. If you can scrape together other sources of income, that's a wise move right now. Otherwise, simply staying informed can help prepare your finances accordingly.
