Social Security's financial woes aren't a secret: The program may have no choice but to cut benefits as early as 2035 if its impending funding shortfall isn't addressed. But contrary to the rumors that abound about Social Security's demise, the program is actually in no danger of going away completely. And if you're thinking of filing for benefits early in the hopes of snagging some income from it while you can, you may end up regretting that move for a long time.
What's happening with Social Security?
Social Security collects its revenue from a number of different sources. First, there's the tax you pay on your income. Next, there's the tax retirees pay on their benefits, which applies to seniors with moderate incomes or higher. Third, there's the interest income generated by investing Social Security's trust funds.
IMAGE SOURCE: GETTY IMAGES.
The problem, however, is that Social Security's trust funds are expected to run dry by 2035. Once that happens, the option to tap those funds to address revenue shortfalls won't exist, and the option to keep investing them will be off the table as well.
The result? Social Security may need to cut benefits by as much as 20%, leaving retirees with less money to rely on.
But while one source of Social Security funding may be depleted within the next 16 years, the program will still have two solid sources of funding at its disposal once that happens. As such, retirement benefits are in no danger of completely disappearing. And as far as cuts are concerned, Congress has a lot to lose by letting that happen, and as such, lawmakers are deep in the process of proposing changes to addresses Social Security's financial problems. In other words, we may not even see the aforementioned benefits cut despite the fact that the program's trust funds are expected to dwindle.
That's why filing for benefits early based on rumors is a bad idea. If you jump the gun because you're fearful of an eventuality that may not come to be, you'll risk shorting yourself financially throughout your golden years.
The dangers of claiming benefits early
Your Social Security benefits are calculated by taking your 35 highest-paid years of wages, adjusting your earnings for inflation, and applying a special formula to determine how much money you're entitled to on a monthly basis. But you can only claim your full monthly benefit once you reach full retirement age. That age is 66, 67, or somewhere in between, depending on the year you were born.
Now you are allowed to claim benefits as early as age 62. But for each month you file ahead of full retirement age, you'll reduce your benefits by a certain percentage. Here's what that reduction might look like:
|
If You File at This Age with a Full Retirement Age of 67: |
Your Benefits Will Be Reduced by This Percentage: |
|---|---|
|
66 |
6.67% |
|
65 |
13.34% |
|
64 |
20% |
|
63 |
25% |
|
62 |
30% |
DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.
Now here's the kicker: The reduction in benefits you face by claiming them early will remain in effect indefinitely unless you withdraw your benefit application within a year and repay all of the money you collected in Social Security within that timeframe. The average senior today, however, collects $17,748 a year in benefits, which means you could be looking at a lot of money to pay back to undo your filing. Therefore, it's best to assume that the monthly benefit you begin collecting is the same amount you'll receive for life, not including annual cost-of-living adjustments.
Of course, there's nothing wrong with claiming your benefits early if you have a good reason to do so. But don't file for Social Security early out of fear that the program is going away. That's far from the truth, and buying into that myth could cause you to make a very bad decision that you spend the rest of your life bemoaning.
