Personal Finance

3 Problems With Social Security You Need to Know About Before You Retire

Maurie Backman

Published: February 3, 2025 2:33 pm

A lot of people get excited to retire and start collecting Social Security. And why shouldn’t they be? After years of paying into the program via wages on taxes, it’s nice to get a piece of that pie.

But if you expect to be reliant on Social Security once your retirement starts, you should know that there are a number of big problems with the program to be mindful of. Here are three to keep on your radar and aim to work around.

1. Benefit cuts are possible

Social Security gets the majority of its revenue from payroll taxes. But in the coming years, that revenue stream is expected to decline as baby boomers retire in masses.

Social Security can tap its trust funds to keep up with the benefits it’s obligated to pay for a period of time. But once those trust funds are out of money, the only solution may be to broadly cut benefits for seniors.

Recent estimates say that Social Security cuts could happen as soon as 2035. That timeline could wiggle in either direction, though.

Because of this, it’s important to not depend too heavily on Social Security for retirement income. If you still have a good number of working years left, take the opportunity to add to your savings so you’re able to make up for potential benefit cuts.

2. Benefits don’t hold up well to inflation

Social Security benefits are eligible for an annual cost-of-living adjustment (COLA). And the point of COLAs is to make sure that Social Security recipients don’t lose buying power from one year to the next.

Unfortunately, though, many seniors on Social Security report having a hard time keeping up with inflation. And the reason boils down to a flaw in how COLAs are calculated.

Those annual raises are based on changes to an index called the Consumer Price Index for Urban Wage Earners and Clerical Workers. But Social Security recipients don’t tend to fall into that category, as many are retired, as opposed to being wage earners or clerical workers. And because Social Security COLAs aren’t based on a more senior-specific index, they tend to result in a loss of buying power from year to year, even when they’re generous.

That’s another reason to have savings outside of Social Security. You can invest your savings in a manner that keeps up with inflation, whereas with Social Security, COLAs are clearly out of your control.

3. Benefits can be subject to taxes

You might think that the Social Security benefit you’re entitled to each month is yours to keep in full. But actually, Social Security benefits can be taxable depending on your income. And the thresholds at which taxes apply are pretty low.

Put another way, if you have even a small amount of income outside of Social Security, there’s a good chance a portion of your benefits will be taxed. Plus, some states impose taxes on benefits (though most don’t). So all told, you can’t expect to keep those benefits in full. And that’s all the more reason to have savings to fall back on for retirement.