I Keep Hearing About Social Security Cuts. Are They Real, or Just a Myth?

Key Points from 24/7 Wall St.

• Social Security is facing financial challenges that could result in benefit cuts.
• A reduction in the ballpark of 20% is possible in 10 years’ time.
• Lawmakers have never let Social Security fall down on benefit payments, and there’s a good chance cuts will be avoidable once again.

Millions of Americans today rely on Social Security for retirement income. And if you’re one of them, the idea of benefit cuts might have you very worried.

The reality is that Social Security is facing some financial challenges in the coming years that could force the program to broadly reduce benefits. But that doesn’t mean you’re guaranteed to see your monthly retirement checks shrink.

Why Social Security may be in trouble

Social Security gets its funding from a few different sources, but the primary one is payroll tax revenue. In the coming years, though, a record number of older workers are expected to retire and start filing for benefits. This creates two problems.

First, a shrinking workforce strips Social Security of crucial payroll tax revenue (because while younger workers will be coming in to replace those aging out of the labor, there will still be a gap). Secondly, an uptick in benefit claims puts stress on Social Security’s finances at a time when its main revenue stream is on the decline.

The good news is that Social Security has trust funds it can draw from to keep up with the monthly benefits it’s obligated to pay. Once those trust funds run out of money, though, benefit cuts may be inevitable.

The most recent Social Security Trustees report projects that the program’s combined trust funds will be depleted in 2035. If Social Security is unable to make up the revenue elsewhere, recipients could be looking at a roughly 20% reduction to their monthly benefits. And given the number of older Americans who largely live on Social Security, that could push countless seniors below the poverty line.

Why the situation is far from hopeless

Things might seem bleak at first in the context of Social Security cuts. And it’s important to recognize that they are a possibility.

But it’s also important to realize that Social Security has faced fiscal challenges in the past, and this isn’t the first time benefit cuts have been on the table. Lawmakers have never allowed benefits to be broadly reduced before, and there’s a good chance they’ll find a way to avoid that this time around, too.

What that looks like, though, is to be determined. Lawmakers may need to make changes to the program to prevent a wide reduction in benefits, including pushing back full retirement age a few more years or changing the way income is taxed to fund Social Security.

Interestingly, president-elect Trump has proposed getting rid of taxes on Social Security benefits for retirees. The thresholds at which those taxes apply are low and have long been met with criticism. But taxes on benefits are another revenue stream for Social Security, so eliminating it at a time when the program is facing a financial crisis may not be the most logical move.

In a nutshell, anyone worried about Social Security cuts will need to sit tight and see what happens. Those who aren’t yet retired should take the idea seriously by boosting savings as much as possible. But there’s a difference between being proactive and panicking. And the latter isn’t necessarily warranted.