Social Security provides monthly payments to millions of retired individuals. And many of those individuals rely on the program for the majority of their earnings.
That’s something we’ve seen this year in particular. Although seniors got a sizable 5.9 percent boost going into 2022, the high rate of inflation is outpacing it by far. That implies that Social Security beneficiaries are losing purchasing power even as their pay has increased.
However, relying too much on Social Security has several drawbacks. To offset a revenue shortfall in the not-so-distant future, SS may have to reduce benefits by 20%. Many elderly people would be left out in the cold as a result of this.
Why benefit cuts are a big possibility
In the near future, Social Security expects to have a cash-flow deficit because of an anticipated baby boomers’ retirement from the workforce. However, Social Security does have trust funds it can draw on to help keep up with the payments as scheduled. But once the trust funds have run out of cash, benefit reductions will be put back on the table.
Meanwhile, the SS Trustees recently published their 2022 forecast, which projects that the SS program’s trust funds will become depleted in 2035. If lawmakers do not come up with a way to address Social Security’s financial imbalance by then, benefits may have to be cut by 20% thereafter.
To be clear, the problem is being addressed (at least to some extent). However, whether benefit reductions are truly avoidable has yet to be determined.
Today’s workers could avoid a future financial crunch
Retirees have a few, albeit restricted, alternatives for preparing for benefit reductions. Those who are not yet retired, on the other hand, have a great chance to position themselves in such a way as to be able to withstand future benefits cuts.
That’s because, even if you still have a job, you can make an effort to contribute to a retirement plan. And it doesn’t always require a lot of money every month to create a respectable nest egg.
Take a 37-year-old employee who has 30 additional years before retirement. If that individual invests $300 each month into a retirement plan and earns an average yearly 8% return (which is somewhat below the stock market’s average), their nest egg will be worth around $408,000 at age 65. This might be an excellent method to deal with smaller Social Security payments later in life.
This isn’t to say that today’s senior citizens cannot do anything to prepare for future benefit reductions. While it might be too late to establish a substantial nest egg, current Social Security recipients might try reducing expenses or working a part-time job to increase their earnings and build up their savings.
All things considered, current and future SS recipients will need to anticipate a 20% pay reduction. It’s a horrible prospect, but it’s something that is not expected to come to pass for nearly 10 years, giving people time to adjust their plans in response.