Many Americans count on Social Security to help fund retirement, but the program’s finances are under increasing pressure. Unless Congress acts, retirement benefits could face a 22% reduction beginning in 2032.
For a retiree receiving the average $2,080 monthly benefit, that would mean about $458 less per month — or $5,491 less per year. According to a recent PensionBee analysis, someone who is 61 today and plans to retire at full retirement age in 2032 may need an additional $137,280 in savings to offset that projected reduction. For younger workers, the gap could be even larger: A 25-year-old today could need to save an additional $205,500.
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While Social Security is not expected to disappear, a smaller monthly benefit could create challenges for retirees who depend heavily on those checks. Here’s who may be most affected — and what Americans of all ages can do now to prepare.
Who Could Be Hurt Most by Social Security Benefit Cuts
Not all retirees would feel the effects equally.
“Americans who rely on the program as a primary safety net rather than a supplemental form of income will be the hardest hit,” said Romi Savova, founder and CEO of PensionBee. “This could include lower-income earners, those with disabilities, and self-employed workers who do not save on their own through a SEP IRA or other alternative.”
Women may also face a heightened risk.
“Women face a series of [circumstances] that leave them disproportionately dependent on Social Security benefits,” Savova said. “Lower wages during working years leave less money to set aside into a personal retirement account, while lower lifetime earnings may lock in a smaller benefit check.”
Career interruptions for caregiving, reduced lifetime earnings and longer life expectancies can all make it harder for women to build retirement savings. As a result, they may be particularly vulnerable if benefits are reduced.
“Broadly speaking, future cuts will exacerbate current inequalities,” Savova said. “Today, millions of retirees rely almost entirely on Social Security benefits, and for many others, checks make up a majority of their retirement income.
“Possible benefit cuts do not stop with retirees, but may ripple to entire families and communities,” she continued. “Given that roughly 1 in 2 people are not saving anything for retirement, taking back some control through personal savings is one of the best things that anyone can do right now.”
How Gen X and Boomers Can Prepare for a Smaller Social Security Check
For Americans approaching retirement, the biggest challenge is time. With fewer working years remaining, making strategic decisions now can have a significant impact later.
“Even if not set in stone, facing a six-figure shortfall in a matter of years is understandably terrifying,” Savova said. “If retirement is around the corner, take an hour for a sense check. Where are you now? Where do you need to be? How much of your future income will Social Security comprise?”
Once you have a clear picture of your retirement outlook, Savova recommends several steps:
Save more in retirement accounts, such as IRAs and 401(k) plans
Take advantage of catch-up or super catch-up contributions if you’re eligible
Explore matching programs, which certain private providers now offer
Consider delaying retirement, which can increase Social Security benefits and give investments more time to grow
“Above all, remain cautiously optimistic,” she said. “There is some data to suggest older Americans are rushing to claim Social Security early out of fear, which can lock in benefits at significantly lower rates.”
If you’re considering claiming benefits at age 62, it may be worth taking a closer look at the numbers first. Savova noted that claiming early can permanently reduce benefits, potentially creating a larger income hit than the currently projected 22% shortfall.
How Millennials and Gen Z Can Close the Retirement Savings Gap
While younger Americans could face a larger projected savings gap, they also have the advantage of more time to prepare.
“For younger savers, time in the market is your best friend,” Savova said. “Yes, the price tag of the shortfall is much higher, but with 40, 30 or even 20 years to go, you can reasonably rely on market returns to offset a significant portion of any possible gap.”
Savova recommends focusing on consistent contributions and maximizing available retirement benefits.
“This can be through an IRA, a 401(k) at work or a SEP account if you are self-employed,” Savova said. “And because compounding works in both directions, look out for ways you may be leaving money — or returns — on the table.”
Some steps that can help include:
Contributing enough to workplace retirement plans to earn the full employer match
Keeping long-term retirement savings invested rather than sitting in cash
Rolling over old 401(k) accounts to avoid unnecessary fees
Increasing contributions whenever income rises
“If you have decades until retirement, hope for the best but prepare for the worst,” Savova said. “It matters less how much you save and more that you’re saving something on your own.”
What Everyone Needs To Know About the Potential Social Security Shortfall
The projected Social Security funding shortfall doesn’t mean benefits are going away. However, it does highlight the importance of building retirement savings that don’t rely entirely on future government benefits.
“Not only does it pave a straightforward path towards a happy retirement, but it can feel better as well,” Savova said. “Protection against future benefit cuts is one aspect, and peace of mind today is another.”
For both Americans nearing retirement and those decades away from it, taking action now could make a major difference if future Social Security checks end up being smaller than expected.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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