Who's Ready for a 22% Social Security Cut?

Millions of Americans depend on Social Security for retirement income. And there are plenty of retirees who get the majority of their income from those monthly benefits.

Also, unlike an IRA or 401(k), Social Security guarantees income for life. That makes the program extremely important at a time when Americans are living longer but also struggling to build savings due to rising costs and persistent inflation.

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Unfortunately, Social Security is facing its share of financial challenges. According to the Social Security Trustees, the program's Old-Age and Survivors Insurance (OASI) Trust Fund is projected to become depleted in 2032. At that point, benefits could face a serious cut if lawmakers don't take action.

Why a 22% benefit cut is on the table

Social Security's financial woes boil down to a shrinking workforce. In the coming years, there won't be enough workers to support a growing number of retirees.

Social Security can pay benefits once its OASI Trust Fund runs out of money. That's because the program gets most of its funding from payroll taxes.

But due to the whole shrinking workforce situation, Social Security needs additional income to bridge the gap between what it receives and the benefits it owes. That's where the OASI Trust Fund comes in. Once it's empty, the program could be looking at a 22% reduction in benefits.

Now Social Security does have another trust fund -- its Disability Insurance (DI) Trust Fund, which pays disability benefits. If Congress chooses to combine the two trust funds, Social Security benefits could potentially continue at a higher level, resulting in a reduction of about 17% instead of 22% once the combined reserves are exhausted.

But that change would require congressional approval. And it also wouldn't fully solve the problem.

Congress has acted before -- but solutions aren't easy

The possibility of benefit cuts sounds alarming, but it's worth remembering that Social Security has faced financial crises before. Most notably, lawmakers approved major reforms in 1983 after concerns that the program would run short of money.

Many policy experts expect Congress to act again before across-the-board benefit cuts occur this time around. The challenge, though, is that none of the available solutions are particularly easy.

One option is to increase the Social Security payroll tax rate, requiring workers and employers to contribute more to the program. That would generate additional revenue but also increase taxes for millions of Americans.

Another option is to raise or eliminate the cap on wages subject to Social Security taxes. Currently, earnings above a certain annual limit are not subject to the Social Security payroll tax.

Requiring higher-income workers to pay taxes on more of their earnings could improve the program's finances. But opponents argue it could have negative economic consequences, especially since employers would have to match those higher taxes.

Lawmakers could also gradually increase full retirement age for younger workers, which is when benefits become available without a reduction. That could save Social Security money and potentially increase revenue by keeping people in the workforce longer. But critics argue that this solution functions as a backdoor benefit cut.

Don't assume Congress will solve the program

History suggests lawmakers are unlikely to allow Social Security benefits to be cut without taking action. But there's no guarantee they'll be able to prevent cuts completely. That's why it's important for current workers to build a retirement income plan that's not too dependent on receiving Social Security benefits in full.

If you're planning for retirement, use Social Security as one piece of your retirement income strategy. But also contribute to your 401(k) or IRA, take advantage of employer matching contributions when available, and invest consistently throughout your career. The more personal savings you accumulate, the less vulnerable you'll be if Social Security cuts are unavoidable.

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