Seniors on Social Security Could Be Headed for a 20% Pay Cut

Millions of retired seniors get Social Security benefits. Some seniors rely on the program for the majority of their income.

This year in particular, that's proved to be a problem. The rate of inflation is much higher than the Social Security raise that was given to them. At a time when they're sitting on a raise, seniors who live mostly on Social Security lose buying power.

There are other issues with relying heavily on Social Security. Social Security may have to cut benefits in the future due to a revenue shortfall. Many senior citizens could be left in the lurch.

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Why benefit cuts are a distinct possibility

Due to an anticipated mass exodus of baby boomers, Social Security expects to owe more in benefits than it gets in revenue. Social Security has trust funds that it can use to keep up. Benefit cuts will be back on the table once the trust funds run out.

According to the Social Security Trustees, the program's trust funds will run out of money in 2055. Unless a solution is found to address the program's financial shortfall, Social Security could have to cut benefits by 20%.

Lawmakers are working on the issue. It's important to plan for benefit cuts because they're still not certain.

Today's workers can avoid a future financial crunch

There are limited options for current retirees to prepare for benefit cuts. Those who are not yet retired have a chance to prepare for a reduction in benefits.

Anyone who still earns a paycheck can try to fund a retirement plan. It doesn't require a lot of money to build a solid nest egg.

A worker is 37 years old and has 30 more years to live. The nest egg of a worker who put $300 a month into a retirement plan would be worth about $400,000. It could be a good way to make up for smaller Social Security benefits down the road.

Today's seniors can do anything to shore up their finances in the event of benefit cuts. Current Social Security recipients can try to cut expenses or work part-time to boost their income and build up some modest savings, even if it's too late to build a sizable nest egg.

Social Security beneficiaries need to prepare for a pay cut. It's not expected to happen for over a decade, so there's time to shift plans to account for that possibility.