Social Security is, for many Americans, a financial lifeline that keeps them safely above the poverty line during retirement and allows them to pay their bills during their golden years. According to the Center on Budget and Policy Priorities, if Social Security didn't exist, an estimated 40.5% of seniors would be living in poverty. However, with Social Security, just 8.8% of seniors are living below the poverty level.
Despite Social Security representing such a critical source of income for retired workers, its future remains in doubt. Thankfully, that doubt does not involve insolvency. Social Security isn't in any threat of going bankrupt, and it will be there for future generations of Americans. The Social Security Trust is primarily funded by the payroll tax, and as long as Americans are working and paying taxes, there will always be money generated for the program to pay out.
The primary concern for Social Security is tied to two ongoing demographic shifts. First, baby boomers are retiring at a rate of more than 10,000 persons per day, meaning the worker-to-beneficiary ratio is on the decline. Secondly, life expectancies have trended higher over the past five decades by an aggregate of nine years, according to the Centers for Disease Control and Prevention, allowing seniors to pull benefits for a longer period of time.
Both issues are expected to exhaust Social Security's more than $2.8 trillion in spare cash by 2034, at which point, the Social Security Board of Trustees estimates an across-the-board benefits cut of up to 21% may be necessary to sustain the program through the year 2090. With Gallup finding, in its latest Social Security poll, that nearly nine out of 10 seniors are reliant, to some degree, on Social Security income each month, a 21% cut could prove devastating.
Surprise! Your Social Security benefits are already being cut
But I have a newsflash for working Americans and pre-retirees: Your Social Security benefits are already being cut, whether you realize it or not.
On April 20, 1983, the Social Security Amendments of 1983, the last major overhaul of Social Security, were signed into law. These Amendments impacted when future cost-of-living adjustments were calculated, adjusted FICA tax rates (i.e., the percentage workers pay into Social Security and Medicare via the payroll tax), and made adjustments to the full retirement age. The added emphasis on this last component is my own, because it's what we're discussing today.
Your full retirement age is the age at which the Social Security Administration deems you eligible to receive 100% of your benefit, which is determined by averaging your monthly income over your 35 highest-earning years. If you claim benefits prior to hitting your full retirement age -- you can claim as early as age 62 -- your payout is reduced. Conversely, waiting to file until after your full retirement age can lead to an even larger monthly payment. On average, Social Security benefits grow by 8% for each year that you hold off on claiming, up to age 70.
Prior to the Social Security Amendments of 1983, the full retirement age for retired workers was age 65. In simpler terms, a retiree could claim Social Security benefits at age 65 and receive 100% of what they were due on a monthly basis. The Amendments of 1983 set out a timetable by which the full retirement age would increase from 65 years to 67 over the coming four decades. This move was made to reflect the aforementioned increase in American life expectancies. You can find your retirement age, which is determined by your birth year, using this Social Security retirement table.
For persons born between 1943 and 1954, the full retirement age was 66 (over the past 12 years). However, beginning in 2017, the full retirement age will begin rising by two months per year until it reaches age 67 in 2022. Raising the full retirement age has the effect of reducing payouts for all future retirees with a birth year of 1955 or later.
For example, retired workers born in 1955 who choose to claim Social Security at age 62 this year could be subject to a reduction of up to 25.8% in their payouts, which is a bit more than the maximum reduction of 25% for those born between 1943 and 1954 who claimed Social Security at age 62 over the previous 12 years. Similarly, waiting until age 70 to claim benefits will only increase payouts by 30.7% for people born in 1955, which compares to the 32% "bonus" that people born between 1943 and 1954 received by waiting until age 70.
Raising the full retirement age means seniors need to either wait longer to receive their full benefits, or they need to be willing to accept a steeper haircut in their monthly payout than seniors in previous years.
For today's working Americans, Social Security benefits are already being cut -- albeit these cuts were planned decades in advance. The only question now is if further cuts may be needed to sustain the program for future generations.