Estimating Increased Retirement Savings Needed in the Event of Social Security Benefit Cuts

Social Security is a crucial pillar of financial security for older Americans, yet concerns about its sustainability persist. Many individuals are worried about the potential reduction or elimination of Social Security benefits as they plan for their retirement. To address these concerns, CNBC consulted Douglas Boneparth, a certified financial planner and the President and Founder of Bone Fide Wealth in New York, who is a member of CNBC's Advisor Council.

Boneparth emphasized that younger clients, in particular, are skeptical about the long-term viability of the current Social Security system and are seeking ways to safeguard their financial future. They want to take proactive steps to mitigate any potential impact.

CNBC asked Boneparth for an illustrative example of how much individuals would need to save if they had to rely on a reduced Social Security benefit or none at all.

Scenario: A 30-year-old woman with a $75,000 annual income has already saved $20,000 for retirement. She plans to retire at age 65 and expects to spend $40,000 per year during her retirement years, with a life expectancy of 90.

1. **Fully Funded Social Security:** If Social Security benefits remain unchanged, she would need to save $375 per month in her employer-sponsored 401(k) plan. This calculation assumes a 6% annual return on investments before retirement and a 4% return after retirement.

2. **Social Security Benefits Cut in Half:** If Social Security benefits are reduced by 50%, she would need to save $750 per month to ensure she doesn't outlive her retirement savings, doubling the amount compared to a fully funded program.

3. **Elimination of Social Security:** If Social Security were entirely eliminated, she would need to save $1,125 per month, tripling the amount needed under a fully funded program.

Social Security is currently the primary source of income for individuals aged 65 and older. Approximately 10% of older adults live in poverty without Social Security benefits, according to the Center on Budget and Policy Priorities. If Social Security benefits were significantly reduced or eliminated, this figure could surge to nearly 40%. On average, retired workers receive around $1,840 per month in Social Security benefits.

Richard Johnson, a senior fellow at the Urban Institute, warns that the elderly poverty rate would skyrocket if Social Security benefits were cut, forcing many seniors to rely on their children for financial assistance.

The sustainability of the Social Security program is challenged by the increasing number of retirees and longer life expectancies. With approximately 10,000 baby boomers retiring daily, the program faces a growing number of beneficiaries. Simultaneously, the ratio of workers contributing to the system through payroll taxes has declined, creating an imbalance.

Without legislative intervention, the trust fund supporting Social Security benefits is projected to be exhausted by 2033. If the trust fund is depleted, benefits will not disappear entirely. Workers will still pay Social Security payroll taxes, and the funds collected will be disbursed to retirees, albeit at reduced levels. The Social Security Administration estimates that approximately 77% of promised benefits would still be payable in this scenario.