Millions of retired seniors get monthly benefits from Social Security. But in about 11 years’ time, those benefits have the potential to get cut in a serious way. There’s really no beating around that bush. However, with some savvy planning on your part, Social Security cuts don’t have to be a problem for you.
Why Social Security cuts may be coming
Social Security gets the bulk of its revenue from payroll taxes. But in the coming years, a huge number of older workers are expected to exit the labor force, thereby denying the program the revenue it needs to keep up with scheduled benefits.
Social Security can tap its trust funds for a period of time to keep paying benefits and avoid cuts. But once those trust funds run dry, benefit cuts might have to happen.
Meanwhile, the program’s most recent Trustees Report puts Social Security’s trust fund depletion date at 2035. That’s an improvement from previous estimates that called for benefit cuts in 2034. But it’s a scary thought nonetheless.
The average monthly benefit could shrink by $400 in 2035
The average monthly Social Security benefit as of April 2024 is about $1,915. Let’s assume that over the next 11 years, which is the projected trust fund depletion date, Social Security benefits rise 2% annually. That 2% is in line with the Federal Reserve’s target inflation rate. That would put the average monthly benefit at $2,381 by this time in 11 years.
However, Social Security may need to cut benefits by 17% once its combined trust funds run out of money. So in that case, the typical senior may be looking at a reduction of about $405 per month, bringing the average monthly benefit in 11 years to $1,976.
That’s only about $60 more per month than what the typical retiree is receiving from Social Security today. Even with 2% inflation, which is a fairly moderate level, that’s not going to be enough of a lift to keep up with regular expenses.
All of this is the bad news. The good news is that Social Security cuts are hardly right around the corner. You have an 11-year heads-up to take steps to compensate for a broad reduction in benefits. And there’s one step it definitely pays to take.
Save now to make up for Social Security cuts
It’s important to not lose hope in the context of collecting your complete Social Security benefit as a retiree. The program has faced financial challenges in the past, but lawmakers have always managed to come through and prevent benefit cuts. So they may be able to work that magic this time around, too.
However, a much better bet is to take an active role in making up for benefit cuts. And you can do that by building a solid retirement nest egg through shrewd investing and consistent savings.
Let’s say you’re 11 years away from retirement age. Even if you have zero savings now, if you were to contribute $600 a month toward retirement in an investment portfolio delivering an average annual 8% return, which is a bit below the stock market’s average, you could end up with a nest egg worth about $120,000.
From there, if you apply the 4% rule to your savings, you’re able to withdraw $4,800 a year, or $400 per month. That right there could help make up for your missing $400 in your monthly Social Security check.
Of course, it’s best to do what you can to save for retirement beyond what you’d need to make up for future reduced benefits. But at the very least, you should try your best to build enough savings to make up for the amount of money Social Security may be forced to take away.
Try to find the silver lining
Social Security’s financial situation isn’t the greatest, but it’s not the worst. Though benefit cuts aren’t a wonderful thing by any means, it’s a much better situation than one that has Social Security disappearing completely.
But still, it pays to do what you can to make up for potential benefit cuts. And while you may be powerless in the context of what happens to Social Security, it’s absolutely within your control to set aside money every month for retirement savings purposes, invest your savings in stocks, and supplement your senior income accordingly.
