Can Your Retirement Income Plan Absorb a 22% Social Security Cut?

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At the same time, it's important to recognize that Social Security is facing a big financial crisis. While payroll tax revenue is expected to continue, once the program's trust…

If your retirement income plan hinges on getting a monthly Social Security check, you're not making a mistake. Despite rumors that the program is on the verge of bankruptcy, Social Security is not at risk of going away. The program gets most of its funding from payroll taxes, so as long as there's a U.S. workforce, Social Security can continue paying benefits.

At the same time, it's important to recognize that Social Security is facing a big financial crisis. While payroll tax revenue is expected to continue, once the program's trust fund that pays retirement benefits runs out of money, Social Security could face a 22% benefit cut.

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The latest Social Security Trustees' report says cuts could occur in late 2032. So the time to start planning for that is now.

If it's any consolation, this isn't the first time Social Security has faced the possibility of benefit cuts. And Congress has never allowed the program to reduce benefits broadly.

But time is running out to figure out how to shore up Social Security's finances. And unfortunately, most of the available solutions to prevent benefit cuts have serious drawbacks.

Congress could, for example, raise the payroll tax rate so that more money flows into Social Security. But that increases everyone's tax burden, so it's unlikely to be a popular solution among the American public.

Congress could also raise or eliminate the Social Security wage cap, which determines how much income is taxed each year to fund the program. But while raising taxes on only higher earners might seem like a reasonable approach, salaried workers split those taxes with their employers. So there could still be consequences that impact Americans as a whole.

Raising the program's full…

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