What a 22% Social Security Benefit Cut Would Actually Mean for Your Monthly Check

There are many older Americans who are living on just Social Security. And while it's generally not easy to cover all expenses on Social Security alone, with a very frugal lifestyle, it may be possible.

But that assumes you could continue collecting your monthly Social Security checks in full. Based on the latest update from the Social Security Trustees, that may not be possible for much longer.

The unfortunate reality is that Social Security benefits are now facing the possibility of a 22% cut, and that could hurt the typical retiree in a very serious way.

Why Social Security faces broad benefit cuts

The reason Social Security faces broad benefit cuts boils down to a shrinking workforce. The program gets the majority of its funding from payroll taxes. But in the coming years, there won't be enough participants in the labor force to support benefit payments.

Social Security could rely on its Old-Age and Survivors Insurance (OASI) Trust Fund to keep up with scheduled benefits. But once the OASI Trust Fund runs out of money, the program may have to cut benefits.

The most recent report from the Social Security Trustees found that the OASI Trust Fund could be empty by the fourth quarter of 2032. At that point, Social Security may have to implement a broad 22% benefit cut unless lawmakers are able to come up with a way to prevent a reduction of that nature.

The average Social Security benefit could take a serious hit

The good news out of the most recent Social Security Trustees report is that the program is not going bankrupt, and that currently, potential cuts may be limited to 22%, allowing recipients to still collect the majority of their monthly benefits. But a 22% cut could be catastrophic for retirees who get all of their monthly income from Social Security.

Furthermore, a 22% cut could reduce the average Social Security benefit significantly. The average retiree on Social Security today collects about $2,086 per month. If benefits are reduced by 22%, the typical recipient would lose out on about $459 in monthly income. On an annual basis, that's a loss of about $5,500.

Social Security COLAs could suffer, too

If Social Security benefits are cut broadly, not only might recipients' checks shrink, but the program's cost-of-living adjustments, or COLAs, could become less generous. That's because COLAs are assigned on a percentage basis.

This year, for example, Social Security benefits got a 2.8% COLA. But the smaller the benefits are to begin with, the less valuable COLAs are.

Case in point: A 2.8% COLA applied to a benefit of $2,086 results in a $58 boost. But let's say a 22% cut happens and the average monthly Social Security benefit shrinks to $1,627. In that case, a 2.8% COLA would only produce a $46 increase. Smaller increases could make it harder for retirees to keep up with rising costs over time.

Prepare for benefit cuts in case they happen

Social Security is not doomed to cut benefits, even though its finances are clearly in trouble. The program has faced similar challenges in the past, and Congress has always managed to intervene in time to prevent benefit cuts.

But it's important to prepare for Social Security cuts in case they aren't preventable this time around. And a good way to do so is to reduce your reliance on those benefits.

If Social Security makes up most of your retirement income, consider going back to work in some capacity. You could do gig work, start a business, or commit to a part-time job. That extra income could easily make up for smaller benefits.

You could also try renting out part of your home to generate income. That could mean renting out a room, a finished basement, or a garage you don't use.

Finally, be mindful of your spending. There may be expenses you could reduce. That won't raise your income, but it could make it easier to get by on smaller Social Security checks if you end up having to.

Bottom line

Social Security is a key income source for many retirees today. The good news is that benefit cuts are not set in stone, and lawmakers have several potential solutions they could look at to prevent those cuts from happening.

But it's important to prepare for Social Security cuts if those benefits are a key source of income for you. Even if lawmakers manage to stave off a 22% cut, they may not be able to prevent cuts fully. So it's best to have a backup plan.

Working part-time is a great way to boost your senior income. But if you're still working full-time, it's important to do what you can to build retirement savings, such as contributing monthly to an IRA or taking full advantage of your company's 401(k) match. The more supplemental income you have in retirement, the easier it may be to eliminate some stress living on Social Security.

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