You hope that when you retire, Social Security benefits will be available to you. And while you've heard that Social Security probably won't disappear completely, you're unsure how much you should rely on it in retirement.
As strains to the system have emerged, solutions have been created. And you'll probably see more changes in the future. Here are four ways Social Security could be further altered and how it might affect you.
Raise full retirement age
When Social Security was formed in 1935, the Full Retirement Age (FRA) when you could collect your standard benefit was 65. That age stayed constant for decades but has since changed. Now, if you were born between 1943 and 1954, your FRA is 66. If you were born after 1960, your FRA is 67. And if you were born between 1954 and 1960, it's somewhere in between.
These modifications have been put in place to address rising life expectancy that has grown from an average of 60.7 years to 78.8 years over the last 85 years. And if it continues increasing, the number of years on average that Social Security recipients receive benefits from this program will too. And one way of managing expected shortfalls with Social Security is by raising the FRA even more.
Knowing this could be true, you could make working longer part of your retirement plan. Doing this could help mentally prepare you for working a longer number of years. You can also keep your planned retirement age the same, but delay taking Social Security until you reach your FRA. Or plan for a reduced benefit for taking it at an earlier age.
Increasing the FRA and, as a result, decreasing the number of years on average that recipients receive benefits is a way of managing longevity. Another strategy could involve changing the way benefits are calculated so that recipients would still be eligible for their standard benefit at the same FRA, but their monthly payments are smaller.
Social Security income replacement will differ based on what you made when you were working. For example, for someone earning $24,191, Social Security will replace 53% of their income, for someone earning $53,757, it will replace 40%, and for someone earning $132,048, it will replace 26%. But no matter how much Social Security will make up of your previous income, you may need more money saved as a result of this type of change.
Cutting expenses by creating a budget and reducing discretionary spending is one way you can find money to save. You can also consider working a part-time job and directing the additional income that you make into accounts earmarked for retirement.
Reduce benefits to high-income individuals
A possible fix for Social Security could be reducing the benefits for people who make more money. Lower payments to these individuals could make it so that recipients who rely more on Social Security for a larger part of their retirement income aren't being impacted by cuts to the system as much.
But what's considered a high-income individual is broader than you may think. And if this measure were taken, you could be impacted if you are in the top 50% of wage earners. In 2020 you would've fallen into this category if you made $68,400 or more. If you are among the top 25% of Americans who in 2020 made $123,580, you may be able to easily save more into your retirement accounts. And maxing out your 401(k) and contributing excess money to a nonretirement account could help you make up for a lower Social Security payment. But if you don't make this much and are already saving as much as you can, you can look for benefits like company matches that can increase your annual contributions without using more of your own money.
The cost of living adjustment (COLA) is an annual increase that Social Security recipients get that helps them keep up with rising living costs. It is not believed that this benefit will go away but the annual increase could shrink in the future.
In 2021, you would've received an increase of 1.3% to your monthly payments. But the current inflation rate is 2.6%. If this gap grows even wider, your income will grow by less than the goods and services you purchase. And maintaining your lifestyle in your later retirement years may be harder than it was in the early ones.
Keeping your retirement accounts invested in some portion of stocks even while you're retired could help. You take on more risk with stocks, which typically means that they grow more over the long term. These higher rates of return can help you outpace inflation and avoid living on a fixed income.
Social Security probably won't go away, but it could change quite a bit. And these changes could greatly impact how you live in retirement. But if you plan on including your payment in your retirement projections, being aware of these possible changes can help you properly prepare for them.