What Everyone Gets Wrong About the Future of Social Security

Many seniors today depend heavily on Social Security to cover their expenses. But if you’re not expecting to do the same, you’re probably in good company.

A lot of people think that Social Security is on the verge of bankruptcy, and that benefits will no longer be payable in the coming years as the program completely runs out of money. That, frankly, isn’t the situation at all. And knowing what’s really happening with Social Security could give you some much-needed peace of mind in the course of your retirement planning.

Benefits will still be around

Social Security gets the bulk of its revenue from payroll taxes. So as long as we continue to have a workforce, the program can be funded to some degree.

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In the coming years, though, Social Security expects to owe more in scheduled benefits than it collects in revenue. And we can blame baby boomers for that.

See, boomers are expected to stage a mass workforce exodus in the coming years upon reaching retirement age. At that point, they’ll start drawing their Social Security benefits because, well, they’re entitled to do so. But that could put a huge strain on the program. Even if many workers start entering the labor force, it likely won’t be enough to replace the boomers who are leaving, putting Social Security in a tough position.

Now the good news is that the program has trust funds it can raid to keep up with scheduled benefits — that is, until those funds run out of money. The Social Security Trustees now anticipate that happening in 2035, and while that date could change, it’s fair to assume that the trust funds will be out of money at some point. Once that happens, benefit cuts will be on the table.

But while benefit cuts are not a good thing at all — especially for seniors who get all or most of their retirement income from Social Security — they’re also not the same thing as having benefits disappear completely. And that’s an important distinction to make.

It’s good to be realistic

At this point, there’s really no need to write off Social Security income in the course of your retirement planning. But should you anticipate smaller benefits and save more in your IRA or 401(k) plan to compensate? Absolutely.

The reality is that at this point, we can’t say with certainty what benefits will amount to. Much will hinge on the extent to which Social Security blows through its cash reserves over the next decade, and also whether lawmakers manage to intervene with changes that funnel more revenue into the program.

To play it safe, you may want to take your estimated Social Security benefit and slash it by 30%, which is actually more than what current benefit cuts are looking like. If you then make sure to compensate for that hit by boosting your personal savings rate, you’ll put yourself in a great position to retire comfortably.

Stick to the facts

There’s a lot of misinformation circulating about Social Security, but don’t assume that you won’t get any sort of benefit from the program once you retire. Instead, be realistic about benefit cuts — and save enough so you don’t have to worry about them.

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