Social Security is a lifeline for many seniors, providing half of all household income for 50% of retired couples and 70% of unmarried persons. Sadly, this entitlement program isn't in very good financial shape.
In fact, the combined trust fund for retirement, survivors, and disability benefits is expected to run short by 2035, which could necessitate a 24% cut in retirement benefits. And the day of reckoning for Social Security could come even faster because of the financial effects of COVID-19.
To stave off disaster, lawmakers will have to act sooner rather than later. And one proposal that's received support from both sides of the aisle could amount to a huge benefits cut, even if it doesn't directly call for reducing benefits.
Beware of this roundabout method of slashing your Social Security benefits
Although few politicians will come right out and say they want to give future Social Security beneficiaries less money, there's an option that's come up often in negotiations that would have this exact effect. It's raising the full retirement age (FRA).
FRA is the age when you can receive your standard benefit amount. FRA started at 65, but it's been changed before. The Social Security Amendments of 1983 ushered in its gradual increase to 67, and everyone under age 83 today has already felt the effects.
How would changing full retirement age cut your Social Security benefits?
To understand how a change to full retirement age is a stealth benefits cut, you have to know a little about how the program works.
Your standard benefit amount is determined using a formula that entitles you to a portion of inflation-adjusted average wages over your 35 highest-earning years. For each of the first 36 months before FRA you claim benefits, they're reduced by 5/9 of 1%. For any prior months, they're reduced by an additional 5/12 of 1%. This may not seem like much, but it adds up to a 6.7% cut for each of the first three years and a 5% cut each prior year. If you claim later than your FRA, benefits increase by 2/3 of 1% per month until 70, amounting to an 8% annual increase.
If FRA is raised, you'd have to wait longer to get your standard benefit and you'd have fewer opportunities to earn delayed retirement credits, if the opportunity exists at all. If you were born in 1960 or later and plan to claim Social Security at 67 (your current FRA) but your FRA changes to 70, your checks would be 20% smaller.
You might have the option to wait (if circumstances allow), but that would mean giving up years of benefits, which also has a huge cost.
Is there really support for this?
So how likely is this outcome?
While President Trump hasn't specifically mentioned raising FRA, most Republican proposals to shore up Social Security involve changes to the retirement age, sometimes to as late as 70.
And while Joe Biden is currently campaigning on various expansions to benefits, he's expressed in the past that he's open to raising the retirement age. So despite resistance on the part of most Democrats, it could potentially be part of a compromise to save Social Security if Republicans retain control of the Senate (especially if they also retake the House majority).
If FRA is changed, many workers unable to stick it out until their new standard retirement age will see much smaller Social Security checks. And even those who wait longer will get less total lifetime benefits due to years of missed income and fewer delayed retirement credits.
Future retirees should be aware this stealth cut is possible, or perhaps even likely, and plan accordingly when setting retirement investment goals.