Please ensure Javascript is enabled for purposes of website accessibility

3 Social Security Benefit Cuts That Are on the Table

By Christy Bieber – Jun 20, 2020 at 6:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Future retirees may very well see smaller checks!

Warnings abound about impending Social Security benefit cuts if the program's finances aren't fixed in the coming years. While an automatic benefit cut could become necessary in 2035 when the program's trust fund runs dry, action on the part of lawmakers to fix this issue doesn't necessarily mean that retirees will get everything they've been promised.

In fact, it's very likely that any solution to fix Social Security could involve a cut to benefits in its own right, even if lawmakers don't necessarily come right out and say they're reducing the income retirees receive. In fact, three common proposals to shore up Social Security would involve a reduction in income for at least some retirees. Here are those proposals and how they could affect you. 

Older woman sitting on couch looking at check

Image source: Getty Images.

1. Raising the retirement age

Raising the retirement age is popular among Republicans, many of whom point out that life expectancies have risen significantly since Social Security was created. Democratic nominee Joe Biden has also expressed support for raising the retirement age, proposing the idea in 2007 as part of a bipartisan fix for the program. 

Pushing back the age when you can claim a full benefit may not seem like a cut, but it is. If you have to work a year longer to get your standard benefit, you're missing out on a full year of income. And if you retire on the same schedule you had planned, you would be hit with early filing penalties. Plus, if full retirement age is moved to later, you miss the chance to earn delayed retirement credits that raise your benefit for each month you wait to claim after full retirement age, up to 70.

2. Switching to the chained CPI

This method of cutting benefits is a little more complicated, but it basically involves changing the way Social Security calculates inflation when determining annual cost-of-living adjustments (COLAs). 

Under the current system, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used to measure rising prices and determine whether seniors' benefits need a boost to keep pace with inflation. But in 2014, President Barack Obama suggested a switch to a different price index, the Chained Consumer Price Index. This pricing index accounts for the fact that consumers adjust their purchasing behavior when prices rise; for example, switching to chicken when pork prices go higher, or vice versa. 

A switch to the chained CPI would mean benefits would rise more slowly and beneficiaries would lose more buying power over time. And with some experts concerned that COLAs are already too low to reflect the rise in prices for things seniors most often spend on, this could be a big problem. 

3. Means-testing benefits

A final proposal that has been supported by some Democrats is to means-test benefits. This would mean that higher-income retirees would see a reduction in their benefits or even get none at all if their income exceeded a certain limit. 

Social Security is already progressive, providing lower-income workers with benefits equaling a larger percentage of their pre-retirement income. But imposing means-testing would be a radical shift in the way Social Security works. It's always been sold as an entitlement since people earn their benefits based on what they pay in. 

Means-testing could also eventually result in an increasing number of retirees being excluded from benefits if the income limits at which benefits were phased out weren't indexed to inflation.

How will lawmakers resolve the shortfall?

It remains to be seen if these solutions make it into a final plan to shore up Social Security, or if politicians take any action at all before the program's finances become more dire.

But current and future retirees need to prepare for a likely benefit cut in the coming decades, either because the program runs out of money or because lawmakers reduce retirees' income to make sure that doesn't happen. 

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.