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For years, rumors have been flying that Social Security is at risk of going bankrupt and stopping benefits altogether. But that’s just a giant myth.
Social Security can’t go bankrupt because it gets funding from payroll taxes. So as long as people continue to earn paychecks, Social Security can continue paying benefits.
However, Social Security is facing a major funding shortfall in the coming years due to a shrinking labor force. Once the program’s trust funds run dry, Social Security may be forced to cut benefits broadly. And that could have a huge financial impact on the typical beneficiary today.
Social Security cuts could be brutal
As of now, Social Security may be looking at a 22% cut in 2032, according to the program’s Trustees. A change of that nature would reduce the average monthly $2,083 benefit today by $458.
Let that sink in for a minute. Seniors who can barely get by on $2,083 a month today could see their monthly checks shrink to $1,625 if lawmakers don’t act.
The good news, of course, is that lawmakers can act. There are multiple solutions on the table to prevent widespread Social Security cuts. They include raising payroll taxes, raising the wage cap that determines how much income is taxed each year to fund Social Security, and making workers wait longer to collect their benefits in full.
These solutions aren’t necessarily wonderful. But they do exist. So it’s not a given that Social Security will end up cutting benefits. However, it’s also best to prepare for that possibility in case cuts don’t end up being preventable.
How to gear up for reduced Social Security checks
If you’re already retired, the idea of losing some of your Social Security income is scary. Your best bet now is to assess your spending and figure out if there are ways to cut back.
And you shouldn’t wait for Social Security cuts to happen to reduce your spending. Those cuts may not be on the table for another six years. But if you start spending less today, you can bank some savings to better absorb that hit.
If you’re still working, saving is the name of the game. Increase your IRA or 401(k) contribution rate, and make sure you’re investing your money strategically so it grows over time. If you enter retirement with a $2 million nest egg, it may not matter to you if your Social Security checks are 22% smaller than they’re supposed to be.
And if you’re thinking you’ll never get to $2 million, you may be surprised at how doable it is if you have time on your side. If you sock away $650 a month over 40 years and your investments deliver an 8% yearly return during that time (which is a bit below the average stock market return), a $2 million nest egg could very well be yours.
All told, Social Security cuts are not a given. But if they happen, the average monthly check could be reduced significantly. And the time to prepare for that possibility is now.
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