Social Security serves as an important source of income for millions of retired Americans. Without these benefits, many seniors would struggle to cover even basic expenses like housing and food.
Every year, the Social Security Trustees release a report that analyzes the state of the program’s finances. This year’s report contains some unfortunate news for the elderly. However, the news isn’t entirely bleak either.
The bad news: Benefit cuts could be coming
Social Security It obtains most of its financing through payroll taxes. But as older workers end their careers in the coming years and exit the workforce fairly quickly, payroll tax revenues are likely to decline.
Social Security may draw on its trust funds to track scheduled benefit payments in the absence of adequate payroll tax revenues. (Think of these trust funds as a kind of emergency fund for the program.) But once these trust funds are exhausted, Social Security may have to cut benefits — unless lawmakers can find a way to avoid this undesirable scenario.
To be clear, lawmakers are committed to avoiding cuts to Social Security. But many of the solutions they have proposed to avoid them have negative repercussions of their own.
One suggestion, for example, is to delay the full retirement age (FRA) for workers born in 1960 or later, from 67 to 68 or 69. FRA is when workers can claim their full monthly Social Security benefit based on their individual salary histories. Returning FRA could help the program’s finances, but it would also force many people to work longer than they would like.
Meanwhile, the 2024 Social Security Administrators’ Report states that the program’s combined trust funds are likely to run out of money in 2035. When that happens, benefit cuts may be inevitable.
The good news: Benefit cuts may come later and may be smaller than anticipated
Clearly, any sentence containing the words “Social Security cuts” will, to some extent, be bad news. But let’s look at the positive side of the latest Trustees’ Report.
First, previous estimates have Social Security trust funds running dry by 2034. This year’s report moves the exhaustion date back a year, which gives current retirees who rely heavily on Social Security more time to adjust their expenses and try to accumulate savings to compensate. for future cuts.
Second, this year’s Trustees’ Report predicts that by 2035, Social Security will still be able to track 83% of scheduled benefits. Clearly, this isn’t as good as 100%, but it’s worth noting that previous estimates predicted benefit cuts of 20% or more. A 17% reduction looks much better in this context.
Use the warning to your advantage
In an ideal world, Social Security would not face benefit cuts. But, unfortunately, the program finds itself in a precarious financial situation. And if lawmakers don’t act quickly, benefit cuts could be inevitable.
The best thing to do, therefore, is to assume these cuts will happen and adjust your retirement plans accordingly. While this isn’t necessarily an easy thing to do, you have at least an 11-year window to rise to the challenge.
If you’re still working, increase your 401(k) or IRA contributions by $50 per month this year, $100 per month next year, and so on as possible. And if you’re 50 or older, try to take advantage of catch-up contributions.
If you’re already retired, cutting back on some expenses could lead to modest savings. And joining the gig economy could put a more substantial amount of extra money in your pocket that you can bank for a day when your Social Security checks shrink.
It’s definitely difficult to see a so-called guaranteed monthly benefit being eliminated to some extent. But use the warning to your advantage so your finances don’t get completely messed up in 2035.
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Social Security’s 2024 Trustees’ Report Is a Good News/Bad News Situation for Retirees was originally published by The Motley Fool
