Social Security faces potential insolvency by 2033 if policy adjustments aren’t made, according to recent findings by HealthView Services. This scenario could lead to a projected 21% reduction in Social Security benefits for retirees, with possible cuts of up to $300 per month.
For Americans nearing retirement, understanding these potential changes is essential for financial planning. This article explores the challenges in Social Security’s funding, the potential impact of proposed policy changes, and solutions Congress may consider to address this crisis.
Projected Cuts and the Impact on Retirement Savings
The HealthView Services whitepaper, “Funding Social Security: Ranking the Cost of Proposed Changes on Americans Planning for Retirement,” examines the effect of a 21% cut in benefits due to potential Social Security funding shortfalls.
For affluent couples who are still 25 years away from retirement, such a reduction could mean losing as much as $908,000 in total lifetime benefits. Meanwhile, an average-income couple with only ten years left until retirement might see a lifetime reduction of around $252,000.
These figures underscore the urgent need for reform to ensure Social Security’s sustainability for future retirees. As retirees increasingly depend on Social Security as a primary source of income, a significant reduction in benefits could strain their retirement resources, especially for middle- and lower-income Americans who have fewer options for supplemental income.
Adjusting the Full Retirement Age
One of the potential solutions under consideration involves raising the Full Retirement Age (FRA) from 67 to 68. Such an adjustment would impact lifetime benefits for all retirees. For example, delaying retirement by one year could mean a reduction in lifetime benefits by:
- $325,000 for affluent couples retiring 25 years from now.
- $249,000 for average-income couples with 10 years left until retirement.
By increasing the FRA, the Social Security Administration (SSA) could effectively reduce the amount it pays out in benefits over time. While this approach would ease some of the strain on the program’s finances, it also shifts part of the burden to retirees, who would need to work longer or manage with less support during retirement.
Reducing Cost-of-Living Adjustments (COLA)
Another frequently proposed measure to address Social Security’s funding challenges involves lowering the annual Cost-of-Living Adjustment (COLA).
Currently calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), the COLA could be reduced by 0.5% per year to help curb costs. HealthView Services projects that this reduction would lead to a:
- $287,000 decrease in lifetime benefits for a mass affluent couple retiring in 25 years.
- $100,000 reduction in benefits for average-income couples nearing retirement within ten years.
This reduction in COLA would mean smaller increases to Social Security benefits each year, gradually eroding retirees’ purchasing power over time, especially during periods of high inflation.
Limiting Spousal Benefits
Another proposed adjustment includes reducing spousal benefits from 50% to 33%. Although this change would have a minimal impact on the overall Social Security fund, it would significantly affect lower-earning spouses, particularly those in affluent households.
The report indicates that reducing spousal benefits could cut up to $250,000 in lifetime benefits for couples 25 years away from retirement.
This measure could pose additional challenges for single-earner households, where one partner relies on spousal benefits as a substantial part of retirement income. While it would save funds for Social Security, this option may disproportionately affect families with significant income disparities between partners.
Removing the Earnings Cap
Another approach under consideration is removing the income cap on Social Security contributions. Currently, income beyond a certain limit (around $160,200 in 2023) isn’t subject to Social Security taxes.
By removing this cap, higher earners would pay more into the program, potentially addressing up to 70% of Social Security’s funding deficit.
For example, a couple earning $500,000 annually and retiring in 25 years could contribute an additional $252,000 over their working life. However, this change would not affect their Social Security benefits, as their contributions would not increase their benefit payout. This approach targets higher-income earners, making it a more progressive solution but one that may face opposition from affluent stakeholders.
Increasing Payroll Tax Rates
An additional proposal involves raising payroll tax rates. Currently, employees and employers each pay 6.2% of wages toward Social Security. Increasing this rate to 8% would affect workers across all income levels. According to the HealthView Services report:
- Mass affluent couples could lose up to $133,000 in net income over the next 25 years due to higher payroll taxes.
- Average-income couples nearing retirement within ten years would see a $22,000 decrease in take-home income.
While increasing payroll taxes would bring in additional revenue, this option could place a greater burden on American workers, potentially affecting their ability to save for retirement independently.
Americans Call for Immediate Action
Recent studies show that most Americans believe Congress should prioritize Social Security reform sooner rather than later. A National Institute on Retirement Security (NIRS) study found that 87% of respondents want Congress to address funding issues now, rather than delaying further.
In addition, a survey by the Peter G. Peterson Foundation revealed that while only 30% of respondents were initially aware of the potential cuts, 97% called on elected leaders to take action once they were informed.
With Social Security facing potential insolvency in the coming decade, Congress faces difficult decisions to secure the program’s future.
Options like adjusting the retirement age, reducing COLA, limiting spousal benefits, or increasing payroll taxes each have advantages and drawbacks. Although each proposed solution would impact retirees differently, proactive planning and modest adjustments to retirement savings can help Americans prepare for potential changes.
Retirees and future retirees should stay informed and consider personal strategies for securing their financial future, while legislators work to maintain Social Security as a vital resource for American retirees.
