Don't Wait to Start Preparing for Social Security Cuts

Key Points

• Social Security benefits could be broadly reduced within a decade.

• While lawmakers are no doubt working on a fix, it's unclear as to whether broad cuts will be preventable.

• The time to start preparing to get less Social Security is now.

Social Security is an important program that serves millions of retirees each year. And if you're still an active member of the U.S. labor force, you're probably counting on being able to collect Social Security once your career comes to an end.

The good news is that you can still expect Social Security to be around for you -- even you're an employee with decades left in the workforce to go. But whether you'll get your Social Security benefits in their entirety is a lot more questionable. And that's something you need to prepare for starting now.

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What Social Security's future looks like

Because Social Security gets the majority of its funding from payroll taxes, the program is not expected to disappear and stop paying benefits completely. However, as baby boomers retire in droves and the rate of replacement workers declines, Social Security is expected to have insufficient revenue to keep up with the benefits it owes.

Social Security can tap its trust funds to keep up with those benefit payments. But once there's no money left there, Social Security may have to reduce monthly benefits on a broad level.

Meanwhile, Social Security's Trustees just released a report on the state of the program's finances. It found that Social Security's Old-Age and Survivors Insurance (OASI) Trust Fund will only be able to pay scheduled benefits through 2033. Once the OASI Trust Fund runs dry, Social Security will only be able to pay 77% of the benefits it's supposed to.

Social Security also has a Disability Insurance (DI) Trust Fund, which is projected to be able to pay 100% of benefits through at least 2099. If Social Security's OASI and DI Trust Funds were to be combined, they'd be able to keep up with scheduled benefits through 2034. Once depleted, Social Security will only be able to pay 81% of scheduled benefits.

The time to act is now

At this point, it's pretty clear that Social Security cuts are not only a possibility, but something that might easily happen within the next decade. And while lawmakers may be trying to work on solutions to prevent those benefit cuts, it's hard to say whether they'll be successful or not.

The reality is that while there are solutions to prevent Social Security cuts, each one opens its own can of worms. Raising payroll taxes could better fund Social Security, but that comes at the expense of workers and employers paying more into the system and feeling strained accordingly.

Lawmakers have also discussed making changes to Social Security's full retirement age. But moving it up would force many workers to stay in the labor force longer -- or claim benefits early and face a self-inflicted reduction in their monthly checks as a result.

That's why you really cannot afford to wait to prepare for Social Security cuts. And the best way to protect yourself in light of them is to bring as much savings as you can into retirement.

To that end, funding an IRA or 401(k) plan from a fairly young age is your best bet. The more time your money gets to grow, the larger a balance you're likely to end up with.

The numbers don't lie

Say you're able to save $300 a month for retirement, but you don't start socking funds away until age 40, and you retire at 67, which is Social Security's current full retirement age. At a yearly 8% in your portfolio, which is a bit below the stock market's average, you could be looking at a balance of about $314,000.

However, if you were to start saving that $300 a month at age 37 instead of 40, you'd potentially be retiring with about $408,000 instead, assuming the same rate of return and retirement age. And on the flip side, if you were to wait until 45 to start saving that $300 a month, you'd be looking at about $200,000 in savings, all other things being equal.

It's not easy to face the fact that the program you're paying into may not be able to provide you with the retirement income you deserve to have. But given Social Security's financial situation, you'll be doing your future self a huge favor by preparing for benefit cuts starting today.

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