There are millions of Americans who rely on Social Security as their primary source of income. A recent report from the Social Security Administration (SSA) Trustee’s showed that the trust funds that pay Social Security retirement benefits is expected to be depleted by 2034 if no changes are made.
Now, just to be clear, this does not mean that Social Security will completely disappear, however, the program will only be able to pay approximately 81% of benefits. In simple terms, that means future retirees could see a 20% cut in their monthly Social Security checks if lawmakers don’t fix the problem soon.
What Happens When the Money Runs Out?
Social Security is funded through payroll taxes and for many years it has collected more than what it paid out. That is no longer the case as more baby boomers retire, and people are living longer; this resulted in Social Security paying out more than what comes in.
Should the funds be depleted, it would result in a benefit cut for recipients.
How a 20% Cut Would Affect Retirees
A 20% cut might not sound huge at first, but for many older Americans, it would be devastating.
Millions of retirees rely on Social Security benefits for essential expenses such as rent, food, utilities as well as medical care. A cut to their benefits, will negatively affect them especially in a time where the cost of living is constantly increasing.
Younger Workers Are Worried, Too
There are many millennials and Gen Z that are concerned about whether Social Security will be sustained till they retire. Now even a percentage of benefits will still be paid, there are many younger workers who will have to pay more in taxes and unfortunately receive smaller benefits.
This simply means that they will have to look into other methods of savings and not rely solely on Social Security benefits during retirement.
What’s Behind the Shortfall?
Several key factors are putting pressure on Social Security:
- There are millions of baby boomers who currently retiring and this is increasing the number of people who collect benefits.
- There are fewer workers paying into the system as compared to those who collect benefits.
- People have longer lifespans as compared to many years ago, this means Social Security has to pay benefits for longer.
- Fewer young people entering the workforce means less money going into the system.
In simple terms, there is more money going out of the system as compared to money going into the system.
Can Congress Fix It?
There are ways to prevent this 20% cut, but they require tough political choices. Some of the possible solutions include:
- Increasing the payroll tax that funds Social Security.
- Gradually raising the retirement age.
- Making changes to the benefit formulas for higher-income earners.
It’s important for a decision to be taken as soon as possible.
What You Can Do to Prepare
While the future of Social Security is uncertain, there are steps you can take to protect your own retirement:
- Make sure you start saving as early as possible. Even small amounts set aside regularly can add up over time.
- If possible, wait up until age 70 to collect Social Security benefits, this will ensure you get the maximum out of your benefits.
- Try and look into other savings and investment options and not rely only on Social Security. You need to ensure your financial stability.
- Make sure you are constantly updated of any changes related to your benefits; this will allow you to make proactive decisions.
The Bottom Line
Unfortunately, unless changes are made soon, Social Security will only be able to pay approximately 81% of benefits in 2034. This will mean a potential cut in benefits for future retirees.
With that being said, it’s important to take control of your finances now so that you have a peaceful retirement.