There are millions of older Americans today who rely on Social Security for income. But the program is facing a major funding shortfall in the coming years.
The problem is that Social Security’s main source of funding is payroll tax revenue. But in the coming years, the program is expected to owe more in benefits than the payroll taxes it collects.
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Once the Social Security trust fund that pays retirement benefits runs out of money, program cuts may be inevitable. And the timing of that unfortunately may have just gotten moved up.
Social Security may be closer to insolvency than expected
Last year, the Social Security Trustees reported that the program’s Old-Age and Survivors Insurance (OASI) Trust Fund will be depleted in 2033 . But more recently, the Congressional Budget Office said the OASI Trust Fund could run out completely in 2032.
Once that fund is out of money, benefit cuts are a big possibility. And now, current and future retirees may be facing them even sooner.
That said, it’s important to note that Social Security has faced the possibility of benefit cuts in the past. And lawmakers have never allowed the program to slash benefits.
For this reason, there’s no need to panic just yet about the current situation. But it is important to be vigilant, keep tabs on the news, and have a backup plan.
Preparing for potential Social Security cuts
If you’re not sure Social Security will be able to pay your complete benefits in retirement, then it’s important to plan around that. The good news is that if you prepare for Social Security cuts and they don’t happen, you’ll just have extra money for your senior years. So it’s a win either way.
One of the best ways to prepare for benefit cuts is to boost your IRA or 401(k) savings rate. And if you have an employer retirement plan, aim to snag your full workplace match each year so you don’t give up free money.
It’s just as important to invest your retirement savings wisely. With a 401(k) plan, you’ll often get thrown into a target date fund if you don’t choose your own investments. An S&P 500 index fund may offer stronger returns at a fraction of the cost.
If you have an IRA, you can hold stocks individually. Aim for a mix of companies across a range of industries with a focus on both solid growth and steady dividends.
There’s a good chance Social Security won’t end up cutting benefits, despite the dire warnings. But you can’t assume the best here. Plan for benefit cuts, and if they don’t happen, a gigantic nest egg that’s yours to spend in retirement isn’t a terrible consolation prize.