The program will face some serious financial challenges next year.
Say the word “Social Security” in a crowded room and you might get some interesting responses. And some of those reactions may be rooted in fear.
Rumors are flying that Social Security is on the verge of bankruptcy. And that’s a scary thought, not just for the millions of people who already receive monthly benefits, but also for today’s workers who hope to collect Social Security when they’re ready to retire.
But the truth is that Social Security is not in danger of disappearing. However, the possibility of benefit cuts cannot be ruled out. And that’s what everyone needs to be prepared for.
What’s really going on with Social Security?
Social Security cannot go bankrupt because its main source of income is taxes on wages. But Social Security faces funding shortfalls in the coming years, which could lead to widespread benefit cuts.
Social Security’s Old Age and Survivors Insurance (OASI) trust fund, which pays out retirement benefits, is expected to run out in 2033. Only 77% of benefits will be paid at that time, the Social Security Administration Board said.
Social Security’s Disability Insurance (DI) Trust Fund is in better shape and is expected to be able to pay 100% of scheduled benefits through at least 2099. If the OASI and DI trust funds were combined, the funds would be depleted in 2034, after which 81% of benefits would be paid out.
These exact numbers may change in the coming years. But the end result is the same.
Social Security faces the possibility of benefit cuts unless lawmakers come up with a strategy to stop them. And that’s something you need to pay attention to, whether you’re working or already retired.
How to prepare for social security cuts
It’s important to do everything you can to prepare for a reduction in your Social Security benefits. And if you’re still working, it’s probably a lot easier than if you’re already retired.
If you’re still working, increasing your IRA or 401(k) contributions is a great way to offset potential Social Security cuts. You may also consider delaying claiming Social Security past full retirement age to increase your monthly benefits. That way, if your benefits are cut, you’ll have a larger baseline to start with.
If you’re already retired, Social Security cuts can be even more difficult to deal with. But you still have options.
You can also reduce your spending over the next few years and save your nest egg for later use. And if you already have retirement savings to supplement your monthly check, you can work with a financial advisor to adjust your portfolio to generate more income.
Another option that may be worth considering is returning to work in some capacity. If you enjoy not working, it may not be ideal, but it’s a good way to build savings.
Now you may be thinking: “Even if Social Security gets cut, I’ll always be able to go back to work.” But if you’re already in your 60s or early 70s and a layoff occurs within about 10 years from now, you may no longer have the energy or ability to continue working. Therefore, now is the time to consider working.
While cutting Social Security is a better scenario than the program failing and benefits being cut off entirely, it could still be catastrophic for millions of Americans. We hope that lawmakers can find a way to minimize or completely prevent deep cuts in benefits. But it’s important to protect yourself from such a scenario by building more of a financial cushion to compensate.
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