Social security faces some serious challenges.
If you expect Social Security to be a significant source of income in retirement, you’re not alone. According to a 2024 Gallup poll, a whopping 88% of current retirees say they rely on their benefits, with 60% of that group saying their checks are a major source of income.
However, Social Security is facing major challenges that could become problematic for retirees. The program is not as reliable as it once was, and the situation could get even worse in the coming years.
Given the threat of benefit cuts and a significant loss of purchasing power, excessive dependence on social security could jeopardize your retirement provision.
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Cuts could be imminent
Although Social Security is not at risk of bankruptcy, it is struggling with liquidity problems that could lead to benefit cuts over the next decade.
The program finances its benefits primarily through payroll taxes. Workers pay into Social Security through taxes, and that money is paid out to current beneficiaries. But the program receives less revenue than it pays out in benefits, creating a cash deficit.
To fill the gap and avoid cuts for now, the Social Security Administration has been drawing money from its trust funds – the Old Age and Survivors Insurance (OASI) fund and the Disability Insurance (DI) fund. But those funds won’t last forever, and according to the Social Security Administration’s latest estimates, they’re expected to run out by 2035.
When both funds are exhausted, the program’s revenues will only be enough to cover about 83 percent of planned benefits. In other words, benefits could be cut by about 17 percent by 2035.
There’s a good chance lawmakers will come up with a solution by then. But even some of those solutions could still impact retirees — such as raising the full retirement age or cutting benefits for top earners — so it might be wise to prepare for smaller checks, just in case.
Social benefits are losing purchasing power
Another serious problem with Social Security is its loss of purchasing power over the years. Despite annual cost-of-living adjustments (COLAs), benefits have never been able to keep pace with rising inflation.
Even record-breaking COLAs have not been enough to combat bloated costs. In 2023, Social Security recipients received an adjustment of 8.7%—the highest in four decades. Yet just six months earlier, in June 2022, inflation peaked at 9.1%.
Over time, these deficits add up. According to a 2023 study by the nonprofit The Senior Citizens League, Social Security benefits have lost 36% of their purchasing power since 2000. The study also found that beneficiaries would need an additional $516.70 per month to maintain the same purchasing power as in 2000.
According to 2024 data from the Social Security Administration, the average retiree will receive about $1,900 per month in benefits. Even an 8.7% COLA only means about $165 more per month, and it’s unlikely we’ll see such adjustments again any time soon. To get the extra $516 per month needed to maintain purchasing power, a retiree with monthly benefit income of $1,900 would need a COLA of about 27%.
In other words, pensions are rapidly losing purchasing power, and even higher-than-average COLAs are unlikely to solve the problem. Combined with potential cuts through 2035, when trust funds are expected to be depleted, retirees who rely heavily on Social Security could be hit particularly hard.
What can you do now?
If you’re already retired and have little to no other sources of income besides Social Security, there may not be much you can do—other than do your best and save as much as you can to build some sort of nest egg.
However, if you still have some time before retirement, now is your best opportunity to reduce your reliance on your benefits. That could mean, for example, increasing your savings to build a stronger retirement fund or creating a source of passive income.
You might also consider delaying filing for benefits to get bigger checks. The average benefit amount at age 70 is about $2,038 per month, according to the Social Security Administration. By contrast, at age 62, the average payment is just $1,298 per month – a difference of about $740 per month. If there are benefit cuts or a sustained loss of purchasing power, that extra money can go a long way.
Social Security can be a lifeline in retirement, but relying on it too heavily can put your finances at risk. By taking steps now to make your retirement more financially secure, you can protect yourself no matter what the future holds for Social Security.
