Millions of seniors today collect a monthly benefit from Social Security. And for many, that benefit is their sole or primary source of income.
This year, many seniors who are heavily reliant on Social Security struggled in the wake of rampant inflation. But next year, Social Security is getting its largest cost-of-living adjustment (COLA) in decades. Once benefits rise 8.7%, seniors could end up with a lot more buying power.
In fact, COLAs were implemented decades ago to help ensure that Social Security benefits rise in line with the rate of inflation. But in the not-so-distant future, seniors on Social Security may be looking at the opposite scenario — benefit cuts. And not surprisingly, that has a lot of retirees worried.
Will benefit cuts come down the pike?
In a recent Motley Fool survey, 72% of respondents say they rely on Social Security completely or a lot to cover their retirement expenses. And almost 60% say that they're worried about Social Security's staying power.
Let's get one thing out of the way: Social Security is not in danger of disappearing completely. Benefit cuts, on the other hand, are a distinct possibility.
Social Security is facing a revenue shortfall as baby boomers exit the workforce in droves and too few workers come in to replace them. Workers heavily fund Social Security via payroll taxes, but if the labor force shrinks due to a mass retirement of baby boomers, the program is going to lose out on money.
Social Security has trust funds it can tap to keep up with scheduled benefits for a while as its revenue declines. But those funds are expected to run out in a just a little over a decade. And once that happens, benefit cuts are a distinct possibility.
That could spell trouble for seniors who get most or all of their retirement income in Social Security form. After all, those who have been out of the workforce for many years can't easily sneak back into it and start earning a paycheck. As such, benefit cuts have the potential to fuel a major poverty crisis.
The good news is, that's something lawmakers aren't going to want to see happen under their watch. So they're apt to be invested in preventing benefit cuts.
But so far, no official action has been taken along those lines. And unless lawmakers figure out some changes to Social Security soon, seniors could be in for a rude awakening in a little more than a decade.
Savings can really help
It may be too late for current retirees to boost their personal savings. But current workers should recognize that Social Security cuts can't be ruled out — and build nest eggs to avoid being hurt by them.
Even without benefits cuts, Social Security only replaces about 40% of the average worker's pre-retirement paycheck. And most seniors need a lot more income than that to live comfortably.
Social Security might manage to avoid having to slash benefits. But those who wish to avoid financial stress in retirement would be well-served to sock away plenty of money in an IRA or 401(k) plan to supplement those benefits and avoid a personal cash crunch.
The $18,984 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $18,984 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.