Social Security Benefits Are Set to Cut Early. How Does This Affects You?
American retirees whose retirement plans have already been disrupted by COVID-19 were alarmed to hear that Social Security benefits could be cut sooner than expected.
However, financial experts say there is no reason to panic yet.
Benefits will have to be cut by 2034, according to a report from Social Security and Medicare trustees.
The program will suffer a long-term funding shortfall if Congress does not act.
Furthermore, if Congress does not act, the combined Social Security trust funds can only pay 78% of promised benefits to retirees and disabled beneficiaries.
Some reports suggest that number is closer to 75%.
Money disappears faster than expected for no apparent reason.
A good example of this is last year’s economic downturn brought on by the pandemic, which resulted in a decline in payroll taxes as a result of unemployment.
Although some fear Social Security funds might be depleted if benefits are reduced early, this does not mean the program will run out.
Chicago-based Monotelo Advisors, a financial planning and tax planning firm, says such a thing is unlikely.
Montelo says that if Social Security’s only funding source in twenty years is wage taxes, then the system should be able to pay approximately three-quarters of promised benefits.
In an email to GOBankingRates, Edward Jones retirement strategist Scott Thoma provided a similar perspective.
According to him, just because the Social Security reserves have been depleted earlier than expected doesn’t mean that the program is going under.
“There are changes that can be made to put the program on solid footing,” Thoma said. “For the program to remain fully funded through the 75-year projection period (they run it for 75 years — through 2095), payroll taxes would need to rise about 3.36%, or just under 1.7% for both the employer and employee, to fully fund the program. If no changes are made, benefits would need to be cut by 24% starting in 2034 (they would be able to pay 76 cents for every dollar of benefits).”
And that’s only if Social Security is not fixed by the government.
Several other changes can also be made, including raising the full retirement age, revising reduction formulas, and eliminating the ceiling on taxable earnings.
“The key thing to remember here is that Social Security is not necessarily going bankrupt,” Thoma explained.
Some retirees might be tempted to apply for benefits early if they are concerned their benefits would be reduced.
But that isn’t always the best course of action.
“If you start taking your benefits as soon as allowed, they will be reduced to 70% of your full retirement age benefit,” Monotelo noted.
“Comparing this to the 75% that could be received even after the fund runs out, you would still be hurting your retirement by applying early.”