It is common to hear many people say that they are not confident in Social Security benefits because they will not receive a penny in the future. Because of this belief, millions of people neglect their retirement savings, leaving their financial future to chance. Unfortunately, due to recent news about the Social Security trust funds possibly running out of money in 2035, more people have become skeptical and raised concerns about the future of the Social Security system itself. Even though Social Security might face a serious shortage of funds, that doesn’t mean the whole system will go broke. If you currently receive Social Security benefits, learn more about the upcoming cuts many beneficiaries will probably have to face.
Next cuts to Social Security benefits due to trust fund shortage
The most recent Social Security Trustees Report presented a somewhat tragic picture, as the program’s entire trust fund is expected to be exhausted in 2035. Once that happens, benefit cuts could very well be considered, which would be disastrous for the millions of seniors currently receiving Social Security benefits. However, nowhere in this trustee report is it stated that Social Security is facing a total financial collapse. In fact, given the way Social Security is paid for, it is not.
To have clarity about the whole matter, beneficiaries should know that payroll taxes are the primary source of funding for Social Security. As baby boomers begin to retire in droves—something they more than deserve—this source of revenue is expected to decline in the coming years. But money will continue to flow into Social Security as long as our workforce remains engaged. And for that reason alone, it is absurd to think that benefits will disappear entirely. So if you are worried about this as a potential or current beneficiary, know that benefit cuts are now the worst-case scenario on the table. And even that is not guaranteed.
Furthermore, Lawmakers already understand that cutting Social Security would financially devastate retirees who depend on the program for most of their income. They will probably want to stay away from that. Besides, this is not the first time that the SSA has had to consider Social Security benefits cuts in history, and legislators have always intervened to stop them. However, there is a significant distinction between reducing Social Security benefits and eliminating them.
Social Security benefits might not disappear but it is better to consider additional income sources
While Social Security is not in danger of going bankrupt, you should still have a realistic understanding of how it fits into your future, and find the right balance between Social Security benefits and other sources of income. If you earn a low wage, Social Security will replace only about 40% of your paycheck—even without benefit changes. A 60% reduction in income is too much for most retirees to live on. Therefore, if you can avoid it, Social Security should not even be your primary source of retirement income.
Instead, the majority of your income should come from savings or, if you are lucky enough to have them, a combination of savings and a workplace pension. Ideally, you should use Social Security benefits as a supplemental income in retirement to cover the cost of travel, leisure, and other related expenses. Nonetheless, you will need to accumulate significant personal savings during your working years to do so. But even if you have been working for a while and have not funded a retirement account, it is still possible.
For instance, let’s say you start at $600 a month for your senior years and continue for 25 years, investing at an 8% annual return, which means you’ll have $526,000 in retirement. Increase that to $800 per month, and you’ll have a $702,000 nest egg. Of course, it would be ideal if you could extend your time to retirement. Over 40 years, saving just $400 per month at an 8% return could net you over $1.2 million. Despite the alternatives and strategies you choose to follow, avoid over-reliance on Social Security in retirement, but don’t discount its monthly benefits completely.
