Employees are advised to be diligent about saving for retirement for one main reason: Retirement based on Social Security alone can result in a world of financial hardship.
Social Security will replace only about 40% of the average worker’s pre-retirement wages. And most seniors need a lot more money to live comfortably.
But that 40% figure may not last much longer. Social Security faces a serious financial shortfall that could force it to cut benefits as early as 2035. And as we move closer to that unwanted milestone, it should be a wake-up call for savers and lawmakers alike.
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An income crisis is imminent
Social Security derives most of its income from payroll taxes. But that revenue stream is expected to shrink in the coming years as baby boomers leave the workforce en masse and not enough workers arrive to replace them.
Not only is a mass exodus of baby boomers expected in the coming years, but once those boomers retire, they tend to sign up to receive the Social Security benefits they are entitled to. So all told, the program faces a scenario where it owes more money in benefits than it takes in.
Social Security can tap into its trust funds to make up for that shortfall. But once the program’s cash reserves run out, Social Security may have no choice but to cut benefits.
Meanwhile, the Social Security Trustees’ most recent report estimated that the program’s trust funds are expected to run out of money by 2035. economic circumstances. But either way, Social Security cuts are a real possibility — and they can happen faster than anyone wants.
Preventing a financial crisis
It may be a little late for current retirees to offset the Social Security cuts, as many have not worked for years and are not well positioned to return to a job to boost their income or savings. In addition, some retirees may have health problems that make it difficult, if not impossible, to hold down a job. As such, seniors who derive most of their income from Social Security can unfortunately face a world of upheaval if benefits are cut.
But current workers have a chance to make up for potential Social Security cuts by ramping up their savings efforts. Increasing IRA or 401(k) contributions could go a long way in preventing a personal financial deficit for many people.
It’s scary to think about the idea of Social Security cutting benefits in the not-so-distant future, but it’s also the reality we’re looking at. The sooner today’s workers realize this, the better they can prepare.
At the same time, let’s hope lawmakers recognize the need to come up with solutions that address the Social Security funding gap. Preventing benefit cuts could mean avoiding a massive poverty crisis among the elderly, and that is something lawmakers absolutely need to invest in.
