The Latest Social Security Warning Is Here; Future Retirees Should Pay Attention

Social Security is one of those things where if you see it in the news, it's usually not good. After all, when's the last time you read a headline along the lines of "Social Security Gets Huge Cash Influx?" There's a reason for all that negativity, though. Social Security is facing a serious financial crisis that lawmakers only have a few years to resolve. And while the most recent trust fund update wasn't exactly surprising, it also wasn't fantastic news.

Read:Analyst drastically lowers social security COLA estimate

The latest on Social Security's finances

This year's Social Security Trustees Report was late as usual. That's not necessarily a bad thing, since the news wasn't positive. Now the actual report was 273 pages in length, but here's the gist of it: Social Security's Old-Age and Survivors Insurance (OASI) Trust Fund is expected to run out of money in 2032. That's the trust fund that pays retirement benefits.

Social Security can still pay retiree benefits with a $0 trust fund balance. That's because the program primarily gets revenue from payroll taxes. But due to a shrinking labor force, incoming payroll tax revenue will only be able to cover about 78% of expected benefits. So unless Congress intervenes, once that OASI trust fund is depleted, retirees could be looking at a 22% Social Security cut.

Now if lawmakers were to vote to merge Social Security's OASI Trust Fund with its Disability Insurance (DI) Trust Fund, the combined reserves would be able to keep up with benefits until 2034. And at that point, benefits would be subject to a 17% cut, not 22%. But Social Security can't just combine the funds on its own. And even if lawmakers agree to that, it doesn't solve the broad problem.

Preventing benefit cuts for two more years doesn't do future retirees a lot of good. And while a 17% cut sounds better than a 22% cut, ultimately, a cut is a cut. And no cut is good.

Are Social Security cuts inevitable?

Anyone reading this might assume that Social Security cuts are set in stone. Thankfully, that's not the case. Congress can intervene and prevent cuts from happening, but the consequences could be comparable to the blow of cuts themselves. A popular solution that's often discussed is raising taxes. If you work right now, 6.2% of your wages of up to $184,500 go right into Social Security, and your employer pays 6.2% as well.

If you're self-employed, lucky you. You get to pay 12.4% on up to $184,500 in wages because you're acting as employer and employee. Lawmakers could either raise that 6.2%/12.4% tax rate or simply raise or lift the $184,500 wage cap and limit the tax increase to higher earners. But it's a solution that could sting either way. Another option is raising full retirement age for Social Security, which is currently 67 for anyone born in 1960 or later. Making full retirement age 70 could keep workers in the labor force longer, thereby providing Social Security with added revenue.

But the downside of this solution is clear, and it's that you'll need to wait longer to get your benefits without a reduction. If you don't have savings, it means you'll probably have to work longer, assuming that's an option. And if it's not, you could end up with a self-imposed Social Security cut.

What your takeaway should be

If you're a pre-retiree and are wondering where all this information leaves you, the answer is, prepare for Social Security cuts even if they don't end up happening. That's probably the best thing to do right now.

Don't assume you won't get your benefits. But when you make your retirement plans, assume you'll get about ¾ of the checks you're supposed to get. If you can build a resilient income plan around that assumption and Social Security benefits aren't cut in the end, you'll have even more financial breathing room. Of course, a plan like this generally hinges on having strong savings, a generous pension, or some other lucrative income stream in retirement. Or, it could be a combination.

But remember, even without cuts, Social Security may only replace about 40% of your pre-retirement wages if you earn an average salary. If you earn more than the typical worker today, those benefits will replace even less income for you. You need income outside of Social Security no matter what happens with benefits if you want to maintain your lifestyle once you retire. And if you start with that assumption, factoring a benefit cut into your plans and calculations may not be as tricky or devastating as you would have thought.

This story written for TheStreet by Nifty 50+