Are Retirees Ready for a 21% Cut to Social Security Benefits? Here’s Exactly When It Could Happen. | The Motley Fool

Social Security benefits help millions of seniors to afford necessities, especially as far too many people don’t have enough retirement savings.

Unfortunately, these benefits don’t do a great job of providing for all of the financial needs of retirees. That’s because most people need to replace around 70% to 80% of pre-retirement income at a minimum when retiring, while Social Security benefits typically replace only about 40% of what you were earning before you retired.

This situation could actually get worse soon, though. There’s a potential risk of a benefit cut that would reduce Social Security checks by as much as 21%. Here’s when this could happen and why it might occur.

The Social Security Trustee’s report shows that financial trouble may be on the horizon

Each year, Social Security’s trustees release a report sharing details about the state of the program’s finances. The 2024 report is out, and it should worry seniors who are dependent on their benefits as well as future retirees who are counting on Social Security to be a major income source.

According to the report, the trust fund that supports Social Security is expected to run out of money as soon as 2033. At that time, money will still be coming into the program from taxes collected on current workers and higher-earning retirees. Retirees will keep getting paid some benefits out of the money Social Security is bringing in. But, the law doesn’t allow the program to borrow to fund its obligations. Unfortunately, since there won’t be enough money to pay 100% of the promised benefits without borrowing, an automatic benefit cut would have to happen at that time.

Specifically, Social Security would have the money to pay out 79% of scheduled benefits if the Old-Age and Survivors Insurance (OASI) Trust Fund runs dry as current projections suggest. That would leave retirees facing a 21% cut to benefits which already aren’t really big enough.

Now, there’s a chance that Social Security’s retirement trust fund could be combined with the fund supporting the Disability Insurance program. This would buy another few years, as the combined fund could pay 100% of promised benefits until 2035. If the fund is depleted at that time and automatic benefit cuts have to happen, the cuts also wouldn’t be quite as dramatic. Under this scenario, retirees would expect to receive about 83% of promised benefits, so they’d face just a 17% cut.

However, a change in the law would need to happen to combine these funds. While this would buy a little more time, it ultimately wouldn’t eliminate the long-term risk of a big benefits reduction.

Should you prepare for Social Security benefit cuts?

If you’re retired now or will be in the future, the date when benefit cuts could happen probably doesn’t seem too far away. Naturally, this means there’s cause for concern.

Now, it’s very unlikely that lawmakers are just going to sit back and allow retirees to see a 21% benefits cut or even a 17% reduction. But, there’s been no consensus on change in the recent decades when Congress has discussed Social Security modifications. What’s more, when lawmakers reformed the program in the early 1980s, they pushed through de facto benefit cuts by making Full Retirement Age later and requiring some seniors to pay taxes on part of their Social Security benefits.

If reforms take a similar form, some kind of cut to benefits is likely, even if it’s not a direct reduction in income for current seniors. If FRA is pushed later, for example, Americans will need to choose between putting off their claim for benefits for longer or accepting a reduced lifetime benefit to avoid early filing penalties. Both could leave them with less lifetime Social Security income.

The bottom line is that some kind of reduction in benefits is very possible even if an automatic 21% cut is extremely unlikely. That’s why it’s so important for both current and future retirees to be prepared for the possibility. Maintaining a safe withdrawal rate to preserve savings is a good idea for current seniors, while those planning to retire in the future should make certain to have supplementary savings to provide support in case Social Security falls short. Since Social Security isn’t enough to be a sole support source anyway, having that savings is crucial even if lawmakers step in to stave off those automatic cuts.