Social Security is an essential part of financial planning for most Americans. By providing regular monthly income throughout your lifetime after you reach retirement age, Social Security provides a type of financial security that's hard to match with other assets.
Yet many people fear for Social Security's future. Many have pointed to a long-term catastrophic financial breakdown of the program, and while the worst fears of Social Security disappearing entirely are overblown, the odds of some reduction in benefits in are rising. In a dramatic shift in sentiment, fewer than half of retirees believe the value of future Social Security benefits will be at least as high as what today's recipients get right now, according to the just-released 2018 Retirement Confidence Survey [opens PDF] from the Employee Benefit Research Institute. Those fears are justified, and it's easy to see several ways that Social Security benefits could shrink from current levels.
What the survey said
The number of current retirees expressing confidence in the sustainability of current retirement benefits under Social Security fell sharply in 2018, according to the EBRI survey. Only 7% of those surveyed are very confident that the Social Security system will continue to provide benefits of at least equal value to the benefits received by retirees today. Another 38% were somewhat confident. The total of 45% was down six percentage points from last year's survey.
When you look more closely at the issue, you can find several contributing factors that underscore the fears retirees have. Some are happening right now, while others won't hit until well into the future.
1. Retirement ages are moving up
The first way in which Social Security benefits are shrinking stems from legislation passed 35 years ago. Social Security reform in the early 1980s gradually raised the full retirement age from 65 to 67, with an intermediate stop leaving those born between 1943 and 1954 with a full retirement age of 66. Those who turn 62 and are therefore first eligible for early retirement benefits from Social Security in 2018 will have a retirement age of 66 and four months, with the age rising two months every year until hitting 67 for those born in 1960 or later.
Higher full retirement ages mean larger penalties for taking benefits early and lower bonuses for waiting longer. Some lawmakers have even suggested pushing the retirement age still higher, with 68 or 69 being included in some proposals. If that happens, then the reduction in the value of benefits paid could continue.
2. Chained CPI could be coming
Lawmakers have been calling for Social Security to base its cost of living adjustments on changes in what's known as the chained CPI. This alternative to the regular Consumer Price Index takes into account an economic phenomenon called the substitution effect, which reflects changes in consumer behavior when prices of substitutable goods move in different directions. The net result is a slower rate of inflation with chained CPI that keeps the inexorable rise in Social Security benefits somewhat smaller than it would be under the normal CPI.
Chained CPI won a big victory in the tax reform bill, where the metric will help determine inflation-based adjustments to a wide range of tax law provisions. It won't automatically get used for Social Security purposes, but if it is, it could gradually reduce Social Security's true purchasing power compared to the former inflation measure.
3. Are 25% cuts around the corner?
Finally, the biggest threat to Social Security will come in the early to mid-2030s, when the program uses up its trust funds. The latest projections show that payroll tax and other revenue would only be enough to cover about 75% of old age and survivor benefits currently due under law. Depleting the trust funds could therefore result in a 25% across-the-board cut for those recipients, or lawmakers could structure the hit to have disproportionate impacts on some retirees.
2034 is the year in which Social Security program officials expect the trust funds to run out of money. That gives lawmakers 16 more years to figure out how to deal with the problem before it hits home, but if they can't, then reductions in benefits could be harsh.
Social Security is a great source of retirement income, but it shouldn't be your only financial resource. By setting aside some savings on your own, you'll be much better able to control your own destiny and weather whatever storms might hit Social Security both in the near future and years down the road.
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