Just How Worried Should You Be About Social Security Cuts? Not as Much as You Might Think. | The Motley Fool

It's no secret that Social Security is struggling, and many Americans are worried about its future.

A whopping 87% of U.S. adults say they're concerned about Social Security, according to a 2024 poll from Gallup, with 43% of that group saying they worry "a great deal" about the program. Furthermore, 47% of non-retired adults say they don't believe Social Security will be able to pay them a benefit once they retire.

Social Security has been facing a cash shortfall that could lead to benefit cuts in the relatively near future, so it's fair to be concerned about the program. However, the situation is not as dire as it might seem. Here's why.

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Why might Social Security cut benefits?

First, it's important to understand how Social Security reached this point. In a nutshell, the program's expenditures exceed its income.

Baby boomers are retiring in droves, and the average life expectancy has also increased by more than 11 years since 1950. Between these two factors alone, the Social Security Administration (SSA) is paying out far more in benefits now than in the past.

Exacerbating the problem are declining birth rates and legal immigration. With fewer workers paying into the program through payroll taxes, there's less money to distribute through benefits.

To bridge the gap between what the program's receiving in income and how much it needs to pay out in benefits, the SSA has been dipping into its trust funds -- the Old-Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI). Eventually, though, those trust funds will run out of money.

When might benefit cuts become a reality?

Every year, the SSA releases a report on the state of the program and its outlook for the future. The report includes a snapshot of the OASI and DI trust funds and how long it will take for them to be depleted.

According to the latest estimates, both trust funds may run dry by 2035. If that happens, the SSA will need to rely solely on taxes and other sources of income -- which will only be enough to cover around 83% of scheduled benefits, the report found.

In other words, if nothing changes between now and 2035, benefits could be cut by around 17%.

While it's hard to find any sort of good news in this situation, the silver lining is that benefits won't be going away entirely. Even if the trust funds are fully depleted, beneficiaries will still receive 83% of their scheduled benefit amount, according to the latest estimates. As long as workers continue paying payroll taxes, there will always be some money to pay out in benefits.

What's the solution to this problem?

There are many different ways that SSA could tackle its cash shortfall, but lawmakers have not been able to agree on anything so far.

One of the most popular solutions is to raise payroll taxes for the wealthy. Currently, only income up to $168,600 per year is subject to Social Security taxes -- meaning billionaires are paying the same amount in Social Security taxes as someone earning six figures per year.

Some lawmakers have proposed taxing income over $400,000 per year as well, which would dramatically increase Social Security's funding. This strategy is one of the most effective solutions, as it would eliminate around 61% of the program's shortfall, according to a 2022 study from the University of Maryland.

Other ideas include raising the full retirement age or reducing benefits for the highest-earning individuals, both of which would decrease Social Security's spending. These solutions are not quite as effective, as they'd only eliminate 14% and 11% of the shortfall, respectively.

The SSA may need to implement multiple strategies to fully cover the deficit and eliminate its shortage. With the clock ticking closer to 2035, Congress will need to come to an agreement sooner rather than later to avoid cuts.

Social Security may be in financial trouble, but even in the worst-case scenario, benefits are not going away. The best thing you can do right now is simply stay informed -- and start preparing yourself for the potential benefit cuts that may or may not be looming.