Can Your Retirement Income Plan Absorb a 22% Social Security Cut?

If your retirement income plan hinges on getting a monthly Social Security check, you're not making a mistake. Despite rumors that the program is on the verge of bankruptcy, Social Security is not at risk of going away. The program gets most of its funding from payroll taxes, so as long as there's a U.S. workforce, Social Security can continue paying benefits.

At the same time, it's important to recognize that Social Security is facing a big financial crisis. While payroll tax revenue is expected to continue, once the program's trust fund that pays retirement benefits runs out of money, Social Security could face a 22% benefit cut.

Image source: Getty Images.

The latest Social Security Trustees' report says cuts could occur in late 2032. So the time to start planning for that is now.

Congress can prevent Social Security cuts, but the solutions are difficult

If it's any consolation, this isn't the first time Social Security has faced the possibility of benefit cuts. And Congress has never allowed the program to reduce benefits broadly.

But time is running out to figure out how to shore up Social Security's finances. And unfortunately, most of the available solutions to prevent benefit cuts have serious drawbacks.

Congress could, for example, raise the payroll tax rate so that more money flows into Social Security. But that increases everyone's tax burden, so it's unlikely to be a popular solution among the American public.

Congress could also raise or eliminate the Social Security wage cap, which determines how much income is taxed each year to fund the program. But while raising taxes on only higher earners might seem like a reasonable approach, salaried workers split those taxes with their employers. So there could still be consequences that impact Americans as a whole.

Raising the program's full retirement age is another possibility. It's currently 67 for anyone born in 1960 or later. Moving that age to 68 or 69 could keep more workers in the labor force longer, thereby boosting Social Security revenue. However, for those who can't work longer, a later full retirement age serves as a backdoor benefit cut.

It could help to plan for the worst

You shouldn't let fears over Social Security cuts keep you awake at night. But for your peace of mind, you may want to adapt your retirement plan to a 22% cut in case Congress can't prevent it.

That could mean increasing your IRA or 401(k) contribution rate. It could mean choosing different investments that pay you in retirement. Or, it could mean working a bit longer or spending a bit differently.

Absorbing a 22% Social Security cut isn't necessarily easy. But if you create a plan that works while assuming only 78% of your benefits will be payable, the prospect of cuts shouldn't be as stressful. And then, if benefits do end up payable in full, you'll have that much more of a cushion to work with.

The Motley Fool has a disclosure policy.