Social Security has long been one of the most important sources of income that retirees receive. But while these benefits should provide a reliable, steady source of funds that are guaranteed for life, the program is facing serious financial trouble. And that could have dire consequences for those depending on their benefits.
Sadly, retirees could experience these consequences sooner than you'd think. In fact, a new report from the Committee for a Responsible Federal Budget has revealed today's youngest retirees could be looking at a dramatic cut to benefits by the time they turn 73. Here's what you need to know.
Are you ready for a 25% cut to retirement benefits?
While Social Security's trustees have long been warning that the program's trust fund would run dry in 2035, COVID-19 has made its financial problems worse. Based on new projections, CFRB indicates the trust fund for the Social Security retirement program is expected to be depleted in 2031. That's just 11 years away.
While Social Security will continue to receive revenue from payroll taxes paid by current workers, the insolvency of the trust fund means benefits would need to be cut by roughly a quarter.
Since Social Security benefits are available starting at 62 and there's an 11-year timeline before a 25% benefits cut could happen, today's youngest retirees will be only 73 years old when they face this day of reckoning.
Will this benefit cut actually happen?
Social Security can only pay benefits out of revenue it has coming in and the money in the trust fund -- it doesn't have the authority to borrow. That means if lawmakers don't act and the trust fund becomes insolvent, a cut to benefits is a certainty.
Of course, it's possible lawmakers will take action to prevent today's young retirees from facing a huge reduction in benefits in the middle of their retirement. But that's far from guaranteed. After all, President Donald Trump has promised a payroll tax cut that could deplete Social Security's funding sooner than it's already scheduled to run out. And while presidential candidate Joe Biden is proposing expanding the payroll tax to attempt to shore up Social Security, this may not be as successful as it seems.
It's also worth noting that no president can fundamentally change Social Security without Congressional action, and lawmakers haven't been able to find consensus to make major changes since 1983. Today, our country's legislative bodies are much more partisan than they were then, so a compromise is likely to be much more difficult.
Not only that, but many of the proposals that would help to stave off an automatic cut to benefits involve reducing benefits in some other way, such as by raising the full retirement age or means-testing benefits. Each of these solutions is likely to be politically unpopular, as is a big payroll tax increase.
Since there are no easy solutions, young retirees need to prepare for the possibility they'll see smaller benefits midway through retirement. This means choosing a safe withdrawal rate so they'll have savings to fall back on, and budgeting carefully so they can absorb a cut to benefits if it occurs.
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