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Here's When Social Security Might Have to Cut Benefits

Maurie Backman, The Motley Fool

It's no secret that Social Security is on shaky ground, so much so that rumors abound of the program's potential demise. Now the good news is that contrary to common myth, Social Security is by no means at risk of going broke. The reason? Its main source of revenue is payroll taxes, and so as long as we continue to deduct Social Security taxes from wages, the program can continue to exist.

That said, Social Security's costs are such that they're expected to exceed its total income through 2093. To compensate in the coming years, Social Security has its trust funds to tap. But according to the latest Trustees Report, those cash reserves are expected to run dry in 2035. At that point, recipients might face as much as a 20% reduction in scheduled benefits.

Social Security card held in an older person's left hand

IMAGE SOURCE: GETTY IMAGES.

On the one hand, that's an improvement from the previous year's report, which stated that the program's trust funds would be depleted in 2034. It's also a slight improvement over the previously projected benefits cut -- 20% versus the formerly reported 21%. Still, it's hard to argue the fact that Social Security is in bad shape, and if lawmakers don't manage to step in with a fix, millions of seniors stand to get hurt.

Taking savings matter into your own hands

Though a potential reduction in Social Security is far from good news, the reality is that those benefits were never designed to sustain seniors on their own in the first place. In a best-case scenario -- meaning, no cut in benefits whatsoever -- Social Security is only designed to replace about 40% of the average earner's pre-retirement income. Most seniors, however, need roughly double that amount to live comfortably.

That's why saving independently is the best thing you can do to secure a decent lifestyle in retirement. If you have access to a 401(k) plan through work, you can contribute up to $19,000 this year if you're under 50 or up to $25,000 if you're 50 or older. If a 401(k) isn't on the table, your next best bet is an IRA. The contribution limit this year is $6,000 if you're under 50 or $7,000 for the 50-and-over set.

Now many workers aren't in a position to max out a retirement plan -- especially not a 401(k). But if you make a point of saving some amount of money on a consistent monthly basis, you can more than compensate for a future reduction in Social Security. Case in point: If you're 40 years away from retirement, setting aside $300 a month for four decades will leave you almost $720,000 richer, assuming your savings are invested at an average annual 7% return during that time. Make it $425 a month, and you'll be sitting on over $1 million, all other things being equal.

It's too soon to know whether future beneficiaries will indeed experience a reduction in their Social Security income. There's a lot to be gained by coming up with a fix for the program's shortfall so that millions of seniors aren't at risk of dipping below the poverty line. But until there's an official solution in place, we're all better off preparing for the worst and proactively saving for our golden years rather than relying on money that may or may not be there when we need it.

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