For decades, Americans have worried about the financial condition of the Social Security program. With the Social Security Trust Funds slated to run out of money in 2033, benefits will suffer an immediate cut to reflect the shortfall in tax revenue. Yet despite the huge influence Social Security has over the finances of both currently retired Americans and those who expect to retire in the next 20 years, the impact of those future benefit cuts isn't nearly as big as you'd probably expect.
Putting a price tag on Social Security benefits
A recent study from the Employee Benefits Research Institute [opens PDF] looked at the overall situation among those saving for retirement, measuring anticipated shortfalls between the amount the typical American retirement saver has set aside and the amount of money needed to cover ordinary expenses after you retire. In examining that broader issue, the EBRI also considered the influence of potential changes to Social Security benefits.
Specifically, the EBRI cited current projections for a potential 22% cut in Social Security benefits in 2033, with the amount of the reduction gradually rising over time to reach 27% by 2090, the end of the current 75-year evaluation period for benefits. But while those percentages sound ominous, the dollar value those lost benefits have currently isn't all that substantial. Indeed, according to the EBRI, the impact of those lost benefits on current retirement savings shortfalls is shockingly small.
Below, you can see the retirement savings shortfalls that the EBRI projected in the event that automatic Social Security benefit cuts begin in 2033.
Some of these figures look fairly worrisome, especially for members of Generation X, who are most likely to feel the brunt of the benefit cuts. When you look at married couples, who have the greatest ability to share expenses, retirement shortfalls are projected to be more than $27,000 per person. Single females face shortfalls nearly three times that amount, due to the longer average lifespans for women and the financial challenges that many women face from sources such as unequal pay and shorter working careers.
But the thing to remember is that these figures also include retirement shortfalls due to other factors. Elsewhere in the report, the EBRI gave this view of the overall situation among various cohorts assuming no change in Social Security benefits:
When you isolate the direct impact of Social Security cuts, they turn out to be reasonably limited. The increase in the shortfall for married couples, for instance, is less than $5,650 per person. Single males see about a $4,700 increase, and even the hardest-hit single-female cohort climbs less than $5,100. For older age groups, the financial hit is even smaller, ranging from $1,150 to $2,750 for the late baby boom cohort and from $170 to $735 for early baby boomers.
The key to minimizing the impact of Social Security cuts
To many, these small figures won't make much sense. Even doing some simple math, the typical retiree receiving roughly $1,300 in Social Security monthly benefits could suffer a cut of about $285 per month. With the potential to live 30 years or more after starting to collect benefits, those monthly amounts would add up to far more than just a few thousand dollars.
But the EBRI figures reflect the present value of those future lost benefits, and because they're so far in the future, the present values are relatively small. That in turn shows that by taking action as soon as possible, you can make a big dent in any potential reduction in future benefits simply by boosting your retirement savings by modest amounts now. Even committing just an extra $100 or so in monthly savings means it would take only a few short years for the typical Generation X member to accrue sufficient additional savings to ward off any ill effects from possible Social Security cuts.
Increasingly, it's up to you to make sure your retirement is as comfortable as you desire. As scary as Social Security cuts are, their impact won't be as big as you think -- as long as you don't wait until closer to 2033 to plan for the future.