Social Security is in financial trouble. No, the program is not going bankrupt. That's virtually impossible based on the way Social Security is funded.
Rather, in the coming years, Social Security expects to owe more in benefits than it collects in revenue as baby boomers retire in droves. Social Security can tap its trust funds to keep up with the benefits it's on the hook for -- at least until those trust funds run dry. But once that happens, benefit cuts may be on the table.
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Based on recent projections from the Social Security Administration's Board of Trustees, we're about 10 years away from seeing the program's combined trust funds depleted. At that point, estimates point to a roughly 20% reduction in scheduled benefits.
That's clearly a problem in and of itself. But a big misunderstanding about Social Security exacerbates that program even more.
There's far too much reliance on Social Security
Millions of seniors today get a monthly Social Security benefit. But for many, that benefit constitutes the bulk or all of their retirement income. And there are no doubt many working Americans today who expect to retire on Social Security alone.
The problem, though, is that even without benefit cuts, Social Security will only replace about 40% of the average earner's pre-retirement wages. And most people need a lot more income than that to retire comfortably. So not only are benefits facing cuts, but they only offer limited buying power to begin with.
Don't retire on Social Security alone
Even if benefit cuts weren't a possibility for Social Security, it's a dangerous thing to aim to retire on those monthly benefits alone. You might think you can afford a 60% pay cut until you actually retire and realize that many of your living costs don't decrease as expected. And some -- namely, healthcare -- might increase in a very big way.
That's why it's so important to save as best as you can for retirement -- whatever that means for you. Maybe it involves contributing $50 a month to an IRA or 401(k) plan. Maybe you can swing $100 a month if you cut back on some expenses. But the key is to save and invest some amount of money on a consistent basis so you don't end up cash-strapped as a retiree.
The average retired worker on Social Security today collects about $23,000 a year. Over time, that number is likely to increase in line with inflation and wage growth.