Social Security Isn't Disappearing. But Here's How Bad Benefit Cuts Could Get.

Key Points

• Social Security is facing a revenue shortfall in the coming years.

• If lawmakers can’t or don’t implement effective changes, benefit cuts could be inevitable.

• The latest Trustees report has an estimate on what benefit cuts could look, but it’s important to realize that their number is subject to change.

• The $23,760 Social Security bonus most retirees completely overlook ›

If you say the words “Social Security” in a room full of current and near-retirees, a few thoughts might come to mind. And one of those thoughts is the fear of seeing those essential benefits go away.

Thankfully, that’s not on the table. Despite the rumors that Social Security is on the brink of going bankrupt, the reality is that the program can’t go bankrupt, because of the way it’s funded.

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Social Security gets most of its revenue from payroll taxes. But because the labor force is expected to shrink in the coming years, that revenue stream is expected to decline.

Social Security can use its trust funds to keep up with scheduled benefits for a while. But eventually, those trust funds are expected to run out of money. And from there, Social Security cuts may be inevitable.

Just how bad could Social Security cuts get? There are some numbers out there, but they need to be taken with a grain of salt.

The latest on Social Security’s trust funds

Social Security has two trust funds:

• The Old-Age and Survivors Insurance (OASI) trust fund, which pays retirement and survivors benefits.

• The Disability Insurance (DI) trust fund, which pays disability benefits.

According to the most recent Social Security Trustees report, the OASI trust fund is expected to run out in 2033. At that point, the trustees think only 77% of benefits will be payable, resulting in a 23% cut.

If Social Security were to combine its OASI and DI trust funds, together, they’re expected to be able to pay benefits in full until 2034. But once depleted, Social Security would be looking at a 19% reduction in benefits.

It’s important to recognize that right now, the DI trust fund is not used to pay Social Security retirement benefits. Lawmakers would need to approve a change to combine both trust funds and stretch Social Security’s cash reserves a year longer. However, for projection purposes, the Social Security Trustees often spell things out in terms of combining the program’s trust funds, since it is a possibility.

The numbers could change

The idea of Social Security cuts is very scary — there’s no question about it. But one thing you should know is that the above numbers have the potential to change. Much of that will depend on how much revenue Social Security receives in the coming years, and what other changes come down the pike that impact the program’s finances.

For example, the Social Security Trustees could update their projections next year and say that the program’s combined trust funds are expected to last until 2035, at which point beneficiaries may be looking at an 18% reduction in their monthly benefits, not 19%. Or, the program’s outlook could worsen.

If you’re trying to plan for Social Security cuts, you can use this information as general guidance. But don’t expect it to be accurate to the dollar.

It’s also worth noting that lawmakers may be able to implement changes that prevent Social Security cuts completely, or at least minimize the damage. So if you’re worried about Social Security cuts, don’t assume the worst.

It is, however, a good idea to take action. If you’re already retired, that could mean reducing your spending and, if possible, getting part-time work to build more savings. If you’re not yet retired but getting closer, consider working an extra year. And during that time, really focus on funding your IRA or 401(k) plan.

Finally, read up on Social Security outside of benefit cuts so you can fully understand how it works. That could put you in the best position to make a smart filing decision, regardless of whether benefits are cut.

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