Social Security can be a lifeline for millions of seniors. Preparing for retirement isn’t easy, and your benefits can go a long way toward making ends meet if your savings are falling short.
However, Social Security may not be as reliable as you think. While your benefits can provide an extra source of income, I’m not counting on them in retirement. Here’s why you shouldn’t either.
Benefit cuts may be coming
Social Security is facing a cash flow problem, and benefit cuts could be on the table within the next decade or so.
Benefits are funded primarily through payroll taxes. Workers pay into the Social Security program through taxes, and that money is used to pay out benefits for current retirees. The problem, though, is that there’s currently more money being in from taxes.
To cover the deficit, the Social Security Administration has been dipping into its trust funds. But those funds are expected to run dry by 2034, according to the latest estimates from the Social Security Board of Trustees.
When that happens, payroll taxes will only be enough to cover around 77% of projected benefits. In other words, if lawmakers can’t solve this problem before 2034, benefits could be cut by up to 23%.
While nobody knows for certain what will happen, it may be wise to increase your savings right now just in case. If benefits are reduced in the future, a more robust retirement fund can help cushion the blow.
Social Security is quickly losing buying power
Regardless of whether benefits are cut or not, there’s another problem plaguing Social Security: inflation.
In most years, retirees receive a cost-of-living adjustment, or COLA. This is a small increase in benefits to help your monthly checks keep up with naturally rising inflation. However, even with annual COLAs, Social Security has been strugg buying power.
In fact, since 2000, Social Security benefits have actually lost around 40% of their purchasing power, according to a report from The Senior Citizens League. Even over the last year, inflation has surged roughly 9.1%, while retvedes on5. COLA.
As a result, Social Security doesn’t go as far as it used to. If this problem persists, your benefits will be much less dependable in the decades ahead. And if benefit cuts become a reality in the coming years, it will be even harder to rely on Social Security in retirement.
How to prepare
To be clear, nobody knows exactly what the future looks like for Social Security. There is a chance that lawmakers will come up with a solution to these problems, making the program more dependable for retirees.
However, I’m not betting my financial future on a potential solution. Rather, I’m focusing primarily on building a healthy retirement fund. If Social Security is stronger by the time I retire, those benefits will simply be an extra source of income But if benefits prove to be unreliable, I’ll have plenty of savings to fall back on.
Social Security can be an important source of income, but it has its weaknesses. By understanding these challenges and trying your best to prepare for them, you can ensure you’re ready for whatever may happen.