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There are millions of older Americans today who collect a monthly paycheck from Social Security. And while Social Security represents extra income on top of savings for some retirees, for others, it represents most or all of the money they get to spend each month.
If you’re a retiree who keeps hearing about benefit cuts, that may have you worried — and reasonably so. But before you assume that Social Security is doomed to cut benefits, recognize that cuts aren’t a foregone conclusion.
Why benefit cuts aren’t inevitable
The reason Social Security is facing the possibility of benefit cuts is that in the coming years, the program is not expected to take in enough revenue to keep up with its obligations. The program’s trust funds are expected to run dry within the next decade. Once that happens, retirees could be looking at cuts in the ballpark of 20%.
That’s a scary thing. But one key point to keep in mind is that this isn’t the first time Social Security has faced benefit cuts. And do you want to know how many times in the past lawmakers have allowed the program to cut benefits? Zero.
That’s right. Social Security has never resorted to cutting benefits. Solutions have always been found to keep scheduled benefits on track, and there’s a good chance lawmakers will manage to do the same thing this time around.
The solutions may not be wonderful
While Social Security cuts aren’t a given, the options lawmakers have for preventing them aren’t necessarily ideal. And many of the solutions available to prevent Social Security cuts are likely to impact workers and pre-retirees more so than current retirees.
One solution is to raise the Social Security tax rate — currently 12.4% that’s split evenly between employees and employers. A higher tax rate could pump a boatload of money into Social Security, but at the expense of workers bringing home smaller paychecks and employers facing higher costs.
Social Security could also opt to raise or even eliminate its wage cap, which determines how much income is taxed each year to fund the program. If Social Security gets rid of its wage cap but keeps its current cap on retirement benefits, though, it would create a situation where higher earners are heavily burdened with funding the program with no upside.
There’s also the possibility of pushing back Social Security’s full retirement age (FRA) for younger workers. Currently, FRA is 67 for anyone born in 1960 or later, and it’s when claimants can collect their monthly benefits without a reduction.
Lawmakers could vote to move FRA to 68 or 69. But that would clearly sentence some workers to a later retirement.
Plan for benefit cuts, but don’t assume they’ll happen
Whether you’re currently collecting Social Security or intend to in the future, it’s smart to plan for benefit cuts. If you’re working, that could mean boosting your savings so you’re less dependent on Social Security down the line. If you’re retired, it could mean boosting your income and building savings with part-time work or cutting spending.
That said, Social Security cuts aren’t guaranteed. And there’s a good chance lawmakers will manage to stave them off. But preventing benefit cuts may come at the cost of higher taxes or having to wait longer to claim those benefits in the first place.