Quick Read
Social Security’s trust fund runs dry in 2026, potentially triggering a 22% across-the-board benefit cut as early as late 2032.
Congress can prevent cuts by raising payroll taxes, lifting the wage cap, or increasing the retirement age, but each option carries significant trade-offs.
Workers should build IRA or 401(k) savings now to offset potential benefit cuts; retirees may consider part-time work or tapping home equity.
Read More: Learn 7 ways to generate income with a $1,000,000+ portfolio (sponsor)
There’s a reason the words “Social Security” and “retirement” tend to go hand in hand. For many retirees, Social Security is a critical source of income. And without those monthly benefits, many older Americans would not be able to make ends meet.
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But the latest update from the Social Security Trustees reveals that the program may be in serious trouble. And it’s important to be aware of what may be in store.
Social Security: What the numbers now say
Social Security is facing a funding shortfall due to a shrinking labor force. Thanks to lower birth rates, the ratio of workers to retirees is expected to fall. That’s a problem, because workers are what support Social Security via payroll taxes. Wages are taxed at a rate of 12.4% up to a certain income level per year.
Social Security should have enough money to cover benefits in full through 2026 because it can use its trust fund to fill funding gaps. But once that trust fund runs out of money, Social Security may have to cut benefits broadly.
The program’s Trustees say that based on current projections, a 22% benefit cut could be coming as early as late 2032. That timeline could shift, depending on how much revenue comes in over the next few years. But all told, things do not look good.
Social Security cuts aren’t a given
Even though Social Security is facing a clear financial challenge, the reality is that benefit cuts are not a given. If Congress implements reforms, benefits could be spared.
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There are multiple options for shoring up Social Security’s finances and pumping more revenue into the program. The problem, though, is that any potential solution has an associated drawback.
Raising the current 12.4% payroll tax rate, for example, could increase funding for Social Security. But it would also burden workers with higher taxes, shrinking their net paychecks.
Increasing Social Security’s wage cap is another option, and that change would only impact high earners, not all workers. But it could still have negative consequences. Employers share in the burden of Social Security taxes, and increasing payroll costs could lead to slower hiring and reduced workplace benefits.
Congress could also vote to increase Social Security’s full retirement age (FRA), which is when recipients are able to collect their monthly benefits without facing a reduction. That age is currently 67 for people born in 1960 or later. But that would, in turn, either sentence people to shorter retirements or force them to accept reduced monthly checks. It might also put physical laborers in a tough spot, since they may not be able to extend their careers to accommodate a later FRA.
It’s crucial to prepare
Even though Social Security cuts may end up being avoidable, workers today should prepare for the possibility of smaller benefits. A great way to do so is building savings for retirement. A large IRA or 401(k) could replace missing benefits if Congress isn’t able to prevent cuts entirely.
Retirees need to prepare, too, though they may have fewer options for building savings. Working part-time could be a good solution for those who can manage it, as could cashing in home equity by downsizing.
A $1,000,000 Income Portfolio
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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