Social Security's trust fund is projected to run dry by late 2032, potentially triggering a 22% benefit cut for all recipients.
A 22% cut would shrink the average monthly benefit from $2,086 to roughly $1,627, while also reducing future cost-of-living increases.
Congress has historically prevented benefit cuts, but workers should still build IRA or 401(k) savings as a hedge against potential reductions.
Read More: Learn 7 ways to generate income with a $1,000,000+ portfolio (sponsor)
Social Security serves as the basis of retirement income for millions of older Americans today. But the program is facing some serious financial challenges that could result in big changes.
Let's unpack what's happening with Social Security, how the average benefit might be impacted, and how you can prepare for potential cuts.
Social Security is primarily funded by payroll taxes. But in the coming years, that revenue stream is expected to shrink as the labor force decreases.
At the same time, a large number of older workers are expected to retire and claim benefits. That combination is bound to put a big strain on Social Security. Once the program's trust fund runs dry, Social Security may have to cut benefits if Congress doesn't implement reforms.
The latest update from the Social Security Trustees found that benefits could face a 22% cut once the program's trust funds run out of money, which is expected to happen in late 2032.
The average retirement benefit today is about $2,086. If a 22% Social Security cut is implemented, the average benefit would lose about $459 per month and equal roughly $1,627.
A cut of that nature could be brutal for seniors who get most or all of their retirement income from Social Security. Plus, benefit cuts would hurt in future years by reducing cost-of-living adjustments (COLAs).
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COLAs are implemented on a percentage basis in line with inflation. But if seniors collect smaller Social Security benefits to begin with, those COLAs are apt to produce smaller increases on a dollar basis.
One thing all seniors should realize is that Social Security cuts are not inevitable. The program has faced financial problems in the past, and lawmakers have never allowed benefit cuts to happen. There are different changes Congress can implement to avoid a 2032 cut, though the most popular ones do have drawbacks.
Raising the payroll tax rate, for example, could boost Social Security's revenue. But then workers and employers would be burdened with higher taxes and payroll costs, respectively.
For this reason, it's important to prepare for Social Security cuts even though they aren't a given. And if you're still working full-time, the best thing to do is prioritize retirement plan contributions.
Steadily funding an IRA or 401(k) could lead to a large next egg by retirement age, and those savings could supplement Social Security if needed. The more years you give your money to grow, the more savings you might accumulate.
If you're nearing retirement, you might consider working a few more years to boost your savings and simultaneously leave your nest egg untapped a bit longer. Reducing spending could also help free up last-minute funds for your savings during the tail end of your career.
If you're already retired, you may need a serious budget overhaul if your income plan can't survive a 22% benefit cut. You may need to look at downsizing or relocating to an area that's less expensive. Going back to work is a possibility you can explore, too.
If Social Security cuts happen -- and thankfully, it's still a big "if" -- the typical benefit could shrink quite substantially. It's important to get ahead of that possibility so that if cuts don't end up being avoidable, you won't find yourself scrambling to make ends meet.
If you've saved over $1,000,000, this guide is for you. The last thing you want in retirement is to run out of money, you want your money to generate lasting income while you enjoy your life.
Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor)
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