The Social Security Fixes on the Table Could Be Worse Than the Cuts Themselves

Even if you have savings, there's a good chance Social Security will be a big part of your retirement plan. But unfortunately, the program is facing major financial challenges in the coming years.

The Social Security Trustees recently reported that the program's Old-Age and Survivors Insurance (OASI) Trust Fund will only be able to pay 100% of scheduled benefits until the fourth quarter of 2032. Once the OASI Trust Fund runs out of money, Social Security can still pay benefits. But seniors could then be looking at a 22% cut.

There are solutions on the table to prevent Social Security cuts, but those fixes could end up being worse for Americans than reduced benefits themselves.

Lawmakers have never allowed benefit cuts before

Social Security's current financial crisis isn't a surprise. The program's Trustees have been sounding alarms about Social Security's impending shortfall for years.

The good news is that lawmakers have never let Social Security cut benefits in the past. So there's a good chance they'll manage to prevent cuts this time around, too.

However, lawmakers have a tendency to wait until the last minute to take action. In 1983, Congress implemented changes to prevent Social Security cuts when the program was just months or weeks away from insolvency.

Part of the reason lawmakers may be dragging their feet, though, is that the current options for preventing Social Security cuts are far from easy to implement. In fact, the changes they're contemplating could all have serious backlash.

Raising payroll taxes

Social Security's main source of income is payroll taxes. Wages of up to $184,500 are taxed to fund Social Security at a rate of 12.4%, split evenly between employers and employees. That wage cap is also likely to rise in future years.

Raising the 12.4% Social Security tax rate to a higher number could easily pump more money into the program. But that change will also clearly burden working Americans with higher taxes.

That could make it harder for workers today to save for retirement and supplement their Social Security checks. It could also cause a decrease in consumer spending, leading to an economic slowdown.

Higher taxes could impact corporations, too. Employers might start reducing benefits like 401(k) plan matches, insurance, and wellness programs. And if higher payroll costs become too much of a burden, widespread layoffs could ensue.

Pushing back full retirement age

Full retirement age (FRA) is when Social Security recipients can collect their monthly benefits without a reduction. That age is 67 for anyone born in or after 1960.

Pushing FRA back to 68 or 69 could help prevent Social Security cuts by keeping people in the labor force longer. The more years people work, the more payroll tax the program can collect.

But forcing workers to wait longer to collect their Social Security benefits in full could put some people at risk of not getting to maximize years of better health, thereby leading to a less fulfilling retirement. Worse yet, some workers may not be able to stay in the labor force past age 67 due to health issues. Those who can't hold out for a later FRA could end up with reduced benefits and financial stress throughout their senior years.

Means-testing Social Security recipients

Another option for preventing Social Security cuts is to means-test beneficiaries and withhold or reduce benefits for seniors with high incomes. If some seniors get reduced benefits, it saves the program money.

But means-testing Social Security recipients effectively penalizes people who worked hard and saved well their entire lives. There are some people who retire with millions of dollars, not because they earned $400,000 a year or inherited massive amounts from their family. Rather, it's conceivable that saving and investing for retirement consistently over a 35- or 40-year period could result in a multi-million-dollar nest egg.

Taking benefits away from people who prioritized savings can not only be construed as unjust, but it also changes the nature of Social Security. The program has always operated under the premise that the more people pay in, the more benefits they get, up to a certain point. A change like this likens Social Security to more of a welfare program.

Bottom line

It's not a given that Social Security will end up cutting benefits for retirees. But since the solutions to prevent cuts aren't great, it's best to plan for that outcome, even if it doesn't end up happening.

If you're getting ready for retirement, it's important to take steps to boost a fixed income stream like Social Security that may not be as reliable as you'd like. That could mean growing your savings while you're still earning a paycheck or making plans to work part-time even once you make your primary workforce exit. It's also smart to set yourself up with investments that can provide steady income so you're less reliant on your monthly Social Security checks.