Are You Ready for A 20% Cut To Your Social Security Benefits?
Are you ready for a 20% cut to your Social Security benefits? There’s been a lot of talk about this lately. Will it really happen, or is it clickbait?
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Are You Ready For A Cut to your Social Security Benefits?
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Social Security has been in the news a lot lately. And for good reason. The system is already facing significant financial stress. The benefits paid to retirees exceed the amount of taxes collected. This means we are depleting the Social Security trust fund.
In 2019, the trustees projected that the trust fund would run out of money by 2035. The Covid-19 pandemic has created more unemployment. Now, some are projecting the trust fund will run out of money as early as 2029.
What Happens When The Trust Fund Is Gone?
What happens when the trust fund runs out of money? By law, Social Security can only pay benefits equal to what they receive in taxes. The projected shortfall is currently between 20 and 25%. That means you could have a 20% pay cut.
Here’s an example. If you receive $2,000 per month, a 20% reduction means you’d only receive $1,600. Your benefit gets reduced by $400, or $4,800 less per year.
Why is the Trust Fund Gone?
Why is this happening? One of the biggest reasons is people are living longer. When Social Security began, the average life expectancy was about 65 years old. Today, Social Security projects that both men and women will live into their early 80s.
Also, there are fewer workers, to retirees. That means that they collect less money from payroll taxes.
A real threat, or clickbait?
I don’t think we’ll see benefits reduced. It will get fixed. How they fix it’s going to be hotly debated. The solutions will come from a combination of tax increases and benefit adjustments.
It’s going to be very hard to fix this problem without increasing taxes. Here’s how Social Security taxes work. You pay half of the Social Security tax. Your employer pays the other half. Each pays 6.2%— 12.4% in total. But, only $137,700 of your wages are taxed. Any earnings over that aren’t taxed.
Joe Biden’s tax plan will assess Social Security taxes on earned income over $400,000. But that doesn’t affect a lot of people. At some point, we will see all earned income taxed for Social Security.
It also won’t surprise me if we see the rate increase from 12.4% to 15%. That’s a very real possibility.
I’m not a fan of paying more, but I don’t see how we avoid it
There will be some changes to benefits. The biggest changes will be an increase in the full retirement age. If you were born 1960 or later, your full retirement age for Social Security is 67. I believe full retirement age will increase to age 70 over time.
I also believe we will see an increase to the minimum retirement age. Currently, the minimum retirement age is 62. But, if they increase full retirement age to 70, the minimum retirement age will increase to age 65.
Right now, if you retire at 62, and your full retirement age is 67, you have a 30% reduction in benefits. If they raise the full retirement age to 70, retiring at age 62 means a bigger discount. The reduction will be closer to 50%. And raising the minimum retirement age keeps people in the workforce longer. This means they have more workers to pay those taxes.
It will get fixed, but nobody knows when.
At some point, the government fixes Social Security. It’s political suicide to not make changes and allow benefits to be cut. Nobody will like tax increases, but they will hate benefit cuts more. There are too many Americans who depend on the Social Security system to not do something.
About the Author
Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors. He specializes in helping hard working, middle class families plan for retirement.