Social Security was established way back in 1935 to provide a safety net for seniors. While it has kept millions of retirees out of poverty and still serves as a financial lifeline, the program has undergone some important changes -- and not all of them are good ones. In fact, here are three changes you may not know about that have had an adverse impact on the value of your benefits.
These are changes you need to be aware of whether you're a current or a future retiree. By paying attention, you can adjust your budget or ensure you save more to supplement your Social Security checks.
1. Benefits have been effectively cut for most retirees
When Social Security was created, full retirement age was 65. Full retirement age (FRA) is the age you can receive your standard benefit without reductions for early filing penalties associated with collecting your benefits early.
But full retirement age isn't 65 anymore. In fact, for anyone born in 1943 or later, it's at least 66. Your specific FRA depends on your birth year, but it could be anywhere between 66 and 67.
This change to Social Security happened when Congress amended the law in 1983. But many people aren't really aware of it, because FRA was pushed back slowly. Unfortunately, because of the shift, every retiree born after 1943 experienced a de facto benefit cut. They either need to wait longer to start receiving their checks (forgoing income while they wait) or accept at least a year of early filing penalties if they claim at 65.
2. Monthly checks have lost buying power
Unfortunately, Social Security has changed in another way that's damaging to retirees. The benefits it provides have lost buying power.
That's because Social Security's periodic raises haven't kept pace with the real inflation retirees experience. The metric used to calculate cost of living adjustments (COLAs) doesn't accurately reflect the fact seniors spend an outsized portion of their income on healthcare and housing, both of whch tend to see prices rise faster than other areas of consumer spending.
The consequence is that benefits have lost as much as 30% of their value in just two decades. Sadly, because there were no changes to the law that prompted this, many people didn't really take notice.
3. The IRS is taking its cut from more retirees than ever
Social Security benefits aren't taxed until qualifying income hits a certain limit.
But the limit at which benefits become taxable isn't indexed to inflation. That means as incomes naturally rise over time due to wage growth, an ever-increasing number of retirees will find their earnings cross the limit, and they'll end up owing taxes on Social Security to the IRS.
As many as 50% of seniors have already found themselves in this boat, and this number only grows each year.
What can you do about these changes?
Together, these changes mean Social Security provides less of the income retirees need to support themselves. As a result, future retirees must plan to have more supplementary savings to enjoy the same standard of living current retirees do.
For those already in retirement, most of the effects of these changes are baked into the cake already. You already know what your monthly benefit is, whether your Social Security checks are taxable, and how far your retirement benefits stretch. However, be aware of the fact the value of your benefits may erode throughout retirement.
The best thing to do is to make sure you're living within your means by maintaining a detailed budget. And avoid draining your retirement investment accounts too quickly so you don't run out of money during your lifetime. Maintaining a safe withdrawal rate helps you do that, maximizing the chances you'll have the funds you need to supplement Social Security as you age.