Social Security is not in the best financial shape. The program gets the bulk of its funding from payroll taxes. But in the coming years, that revenue stream is expected to shrink as baby boomers exit the workforce in droves.
Social Security can tap its trust funds to keep up with scheduled benefits for a period of time. But once those trust funds run dry, benefit cuts may have to happen. And recent projections call for a trust fund depletion date of 2034, which isn't so far away.
Of course, it's in lawmakers' best interest to try to avoid benefit cuts and the senior poverty crisis they have the potential to cause. To that end, several solutions have been brought up to prevent that unwanted scenario.
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One idea that's been gaining traction is increasing Social Security's full retirement age (FRA), which is the age at which seniors can claim their monthly benefits in full without a reduction. For workers born in 1960 or later, FRA is 67. But some lawmakers suggest increasing FRA to 68 to 69, so that Social Security has more time before it needs to pay out those benefits in full.
It's an idea that could potentially prevent benefit cuts. But it's also an idea that might hurt workers in a very notable way. Here are some consequences that might ensue if FRA for Social Security is raised by a year or two.
1. You may have to work longer
It's possible to claim Social Security before reaching FRA. You can take benefits once you turn 62. But for each month you claim them ahead of FRA, they get reduced on a permanent basis.
You may not be able to afford a hit to your Social Security income due to a lack of retirement savings. But if FRA is raised, you'll have to wait longer to get your full monthly benefit without a reduction. That means you may have to work longer, which is something you may not want to do -- especially if your job is stressful or bad for your health.
2. You may have less opportunity to earn delayed retirement credits
Right now, seniors who postpone their Social Security claims past FRA get to accrue delayed retirement credits. Those credits boost benefits by 8% a year, so that someone with a FRA of 67 who files at 70 gets to snag a permanent 24% increase to their monthly Social Security check.
Currently, delayed retirement credits stop accruing at age 70. But unless the rules change, if FRA is increased, today's workers will be left with less opportunity to grow their Social Security benefits.
3. You may be subject to an earnings-test limit for longer
You're allowed to work and collect Social Security at the same time. And once FRA arrives, you can earn any amount of money without risking having benefits withheld.
However, the current rules dictate that Social Security recipients who work and have not reached FRA are subject to an earnings-test limit. Earnings beyond that limit result in withheld Social Security income. If FRA is raised to help prevent Social Security cuts, workers could end up subject to an earnings-test limit for longer.
All told, there are clearly some serious drawbacks to increasing FRA for Social Security. Lawmakers will have to work though the pros and cons to determine whether pushing FRA to 68 or 69 is really a good idea.
