As Social Security’s potential insolvency deadline looms in 2033, retirees and those planning for retirement face significant uncertainties about their financial futures. A recent whitepaper by HealthView Services titled, “Funding Social Security: Ranking the Cost of Proposed Changes on Americans Planning for Retirement,” highlights the challenges Americans could face if Social Security funding remains in deficit. This comprehensive study examines proposed solutions to the funding shortfall and evaluates their financial impacts on various income groups, from mass affluent to average-income retirees.
The Impact of Projected Social Security Cuts
Current projections estimate a 21% reduction in Social Security benefits if funding deficits are not addressed. HealthView Services’ analysis shows the drastic effect this would have on retirees at different income levels. For example, a mass affluent couple with 25 years until retirement could lose up to $908,000 in benefits. Meanwhile, an average-income couple with only 10 years until retirement could see their lifetime benefits reduced by $252,000.
Such cuts would severely disrupt retirement plans, particularly for those without substantial savings to compensate. This underscores the urgency of adopting reforms to secure Social Security for future generations.
Raising the Full Retirement Age (FRA)
One proposed solution is to increase the full retirement age (FRA) from 67 to 68. According to HealthView Services, this change could significantly mitigate benefit reductions but would still result in notable losses. For instance, a mass affluent couple retiring in 25 years under this revised FRA would experience a lifetime benefit reduction of $325,000, while an average-income couple would lose $249,000. Delaying retirement by one additional year could help reduce these losses, though it would still lower benefits by $125,000 for mass affluent couples and $95,000 for average-income couples.
Public Opinion on Social Security Reform
Recent surveys highlight public support for timely Social Security reform. A study by the National Institute on Retirement Security (NIRS) found that 87% of Americans want Congress to address Social Security’s funding problems now, rather than deferring action for another decade. Moreover, research from the Peter G. Peterson Foundation shows that once informed, 97% of respondents urged policymakers to take steps to strengthen the program, underscoring widespread concern about Social Security’s future.
Potential Solutions to Address Social Security’s Funding Shortfall
Several proposals have been put forth to close the funding gap for Social Security, each with distinct implications for retirees:
- Lowering Cost-of-Living Adjustments (COLA): Adjusting the annual COLA by 0.5% lower each year, calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), could yield savings. However, it would reduce lifetime benefits for a mass affluent couple retiring in 25 years by nearly $287,000, and for average-income couples by just under $100,000.
- Reducing Spousal Benefits: Another option involves reducing spousal benefits from 50% to 33%. This change would have limited impact on Social Security’s overall solvency but could significantly decrease the lower-earning spouse’s benefits, particularly for mass affluent couples 25 years from retirement, with potential reductions approaching $250,000.
- Removing the Earnings Cap on Contributions: Currently, income above a set threshold is exempt from Social Security taxes. Eliminating this cap would mean that high-income earners contribute more without receiving additional benefits. For a couple earning $500,000 per year, 25 years from retirement, this could mean an extra $252,000 in contributions, which could help address approximately 70% of Social Security’s funding deficit, based on Society of Actuaries modeling.
- Increasing Payroll Taxes: Raising payroll tax rates from 6.2% to 8% for workers could also bolster Social Security’s finances. This increase, however, would lead to a $133,000 reduction in net income over 25 years for mass affluent couples, while average-income couples could see their net income reduced by $22,000 over the next decade.
The Cost of Change: A Balancing Act
HealthView Services’ CEO Ron Mastrogiovanni highlights the complexity of addressing Social Security’s funding needs. Each proposal varies in terms of impact, timing, and how much of the deficit it covers, but they all entail difficult trade-offs. Mastrogiovanni also emphasizes that modestly increasing retirement savings now can help individuals better prepare for potential benefit reductions, making Social Security a reliable pillar of retirement income.
Steps to Prepare for Potential Benefit Reductions
With the uncertainty surrounding Social Security’s future, taking proactive steps to supplement retirement savings has become more important than ever. Here are some steps individuals can consider:
- Increase Personal Savings: Consider maximizing contributions to tax-advantaged retirement accounts, such as 401(k)s and IRAs, to create a stronger financial buffer.
- Delay Claiming Social Security: For those able to postpone benefits past full retirement age, delaying Social Security can significantly increase monthly payments.
- Explore Investment Options: Diversifying investments in other income-generating assets can help mitigate the risk of reduced Social Security benefits.
- Stay Informed: Keep up with potential legislative changes and their implications, as these could directly affect retirement strategies.
How likely is it that Social Security will reduce benefits by 2033?
While no changes have been finalized, the program’s trustees project that without reform, a 21% benefit reduction could occur by 2033 due to funding shortages. Congress is under pressure to act, given the widespread dependence on Social Security among retirees.
What is the current full retirement age (FRA) for Social Security?
For most workers born in 1960 or later, the FRA is 67. However, proposed changes may increase it to 68, which would decrease lifetime benefits if retirement age is delayed.
How would reducing the earnings cap affect high-income earners?
Eliminating the earnings cap would require high-income earners to contribute more to Social Security without receiving additional benefits, addressing a substantial portion of the program’s funding gap.