Social Security Cuts Could Happen in 6 Years. Here's How to Prepare

What would happen to your retirement plans if your Social Security benefits suddenly dropped by 22%? It might sound like a worst-case scenario, but it's a possibility you should take seriously.

The Social Security Trustees recently reported that the program's Old-Age and Survivors Insurance (OASI) Trust Fund could be depleted by late 2032. Although Social Security would not have to stop paying benefits entirely once that happens, the program would no longer have enough money to cover 100% of scheduled payments.

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According to the Trustees' estimates, Social Security benefits will only be 78% payable once the OASI Trust Fund runs dry. That means retirees could be facing a 22% benefit cut.

Even combining the OASI Trust Fund with Social Security's Disability Insurance Trust Fund would not solve the long-term funding problem. That move could potentially stave off benefit cuts for a couple more years and reduce potential cuts from 22% to 17% -- and that's if Congress approves the combination of the two funds.

But that's clearly an incomplete solution. So it's best to prepare for Social Security cuts to avoid upending your retirement.

Don't assume Congress will bail Social Security out

Despite financial problems, Social Security has never had to implement broad benefit cuts because Congress has stepped in with legislation to address funding challenges. But while that history offers some reassurance, it does not guarantee that Social Security cuts will be avoidable this time around.

Congress has a number of fixes it can turn to, such as raising the payroll tax rate, lifting or eliminating the wage cap that determines how much income is taxed to Social Security each year, and raising the program's full retirement age.

But you shouldn't build your entire retirement strategy around the assumption that Congress will prevent Social Security cuts. Even if lawmakers implement changes, there's no guarantee benefits won't be reduced to some degree. So it's best to use the possibility of reduced Social Security payments as a reason to strengthen the parts of your retirement plan you can control.

How to prepare for potential Social Security cuts

Given Social Security's current financial state, creating a retirement plan around a 22% cut is a smart move. First, stress-test your current plan to see what might happen if your Social Security checks aren't fully payable.

Get an estimate of your expected Social Security benefit, reduce that number to 78%, and see if your savings and other income can cover the difference. If that's not the case, you have options.

You could choose to work longer, hold a part-time job in retirement, boost your savings rate, or reduce retirement spending. Or, you could choose a combination of these things.

That said, you may find that boosting savings is your easiest approach if you still have a good number of years in the workforce ahead of you. Even modest increases to your IRA or 401(k) savings rate could make a big difference over time if you have many years to benefit from compounded returns.

You should also review how your retirement accounts are invested. If retirement is far off, go heavy on stocks for maximum growth (but make sure to diversify to mitigate the risk of a stock-heavy approach).

Start taking action now, even if Social Security cuts never happen

Social Security remains an important source of income for many retirees, and a projected 22% reduction is not a given. Congress still has some time to address the program's financial challenges.

But you don't have to wait for lawmakers to make a decision before taking action. By building more savings, reviewing your expenses, and testing your retirement plan against a potential benefit cut, you can put yourself in a stronger financial position to deal with Social Security cuts if they come to be.

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