The fact that Social Security is a critical support in retirement for most Americans hasn't changed since the program was launched back in 1937. But Social Security itself has been changed over the years, and it will likely keep changing -- in part because the program faces a budget shortfall.
For example, the benefits it pays out to retirees change from year to year, based on changes in the cost of living. Most people know about that kind of change. Here are five more changes that might happen -- that fewer people are aware of.
No. 1: The full retirement age might change
Your "full retirement age" (FRA) is the age at which you can start collecting the full benefits to which you're entitled. When Social Security began, that age was 65 for everyone. But in 1983, Congress hiked it to 67. It did so gradually, so that those born before 1938 would keep the FRA of 65, those born in 1960 or later would have one of 67, and everyone in the middle would have a FRA falling somewhere in the middle.
Clearly, the age isn't set in stone, and it could change again. With Social Security facing that future budget shortfall, raising the age is one of the ways that the program could be shored up. The age of 69 is commonly suggested. If the full retirement age increases, it could mean that starting to collect early, which we can do beginning at age 62, will result in smaller checks becoming smaller still.
No. 2: The rate at which you're taxed for Social Security might rise
You've probably noticed that each of your paychecks features a 6.2% bite taken out for Social Security (plus a 1.45% tax for Medicare). You might not realize it, but your employer coughs up a corresponding 6.2% and 1.45%, making the total payroll tax for Social Security 12.4% (plus 2.9% for Medicare). Self-employed folks are probably very aware, because they pay both the employee and employer taxes.
Well, another proposal to bolster Social Security is to hike the payroll tax -- perhaps to 14.8%, 15.8%, or more. The Social Security Administration (SSA) has crunched the numbers for many scenarios. As an example, it finds that hiking the payroll tax rate to 15.9% from 2033 to 2062, and then to 19.4% for 2063 and beyond would make up more than 100% of the shortfall. That means the program could be strengthened further, perhaps with greater benefits.
No. 3: The payroll tax cap might rise -- or be eliminated
Another way that Social Security might be changed in order to address the looming budget problems is that its payroll tax cap might be raised -- or eliminated. What cap, you might ask? Well, not everyone realizes this, but the amount of earnings that workers are taxed on for Social Security is not unlimited. It's capped, and for 2020, the cap (which is changed most years) is $137,700. The cap is high enough that for most workers, all of their earnings are taxed -- but that's not true of high earners. For example, if you earn $1,137,700 in 2020, that first $137,700 of your earnings will be taxed for Social Security, but the next million dollars will not be taxed.
Clearly, if that cap is raised to, say, $500,000, the Social Security program will collect a lot more dollars that can be distributed to retirees. In the interest of fairness, some have suggested eliminating the cap altogether, so that all of everyone's income is subject to the tax.
No. 4: You might get less, if you earn more
Here's another possible future change: Would-be Social Security retirement benefit recipients may be means-tested, with those in the highest income groups getting less in benefits, or perhaps no benefits at all. This could strengthen Social Security by making sure that the neediest retirees receive benefits, while denying benefits to those who, arguably, don't need them, or need them much less.
No. 5: Benefits might shrink by 24%
While there are lots of ways to address the Social Security shortfall, it's also true that little action has been taken to use any of them to strengthen the program. If no action is taken, Social Security's coffers, which have long run a surplus, taking in more from workers than is paid to retirees, will start running a deficit. That doesn't mean no benefits at all, as workers will still be paying into the system. But the ratio of contributing workers to beneficiaries has simply been shrinking in recent decades, as people live longer and need to be supported longer.
It's estimated that Social Security, if not strengthened, will end up able to pay only about 76% of benefits that retirees are entitled to. So you might see your benefits shrink by 24%.
It doesn't have to be that way, though. Solutions abound. It just requires some will from Congress. So feel free to contact your representatives and share any thoughts on Social Security. And in the meantime, stay alert for changes to Social Security that may affect you.