If you've been hearing rumors that Social Security is on the brink of disappearing, here's an encouraging update -- that's not in the cards at all.
It's true that Social Security is facing some financial issues that may results in benefit cuts. But the program is not at risk of going away completely, and it's very important to make that distinction.
That said, the latest Social Security Trustees Report projects that the program's trust funds will be depleted by 2035. So current recipients could be looking at benefit cuts in roughly 11 years.
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Of course, slashing Social Security could result in a widespread poverty crisis among older Americans today. It could also negatively impact future retirees who may not have saved enough to compensate for getting less Social Security. As such, lawmakers are invested in finding ways to avoid those cuts entirely.
But some of the options available to lawmakers to prevent Social Security cuts may be a mixed bag. Here are three potential solutions to Social Security cuts -- and why each, unfortunately, has a flaw.
1. Moving full retirement age back a few years
Full retirement age (FRA) is the age at which you're eligible for your complete monthly Social Security benefit based on your personal earnings history. Right now, FRA sits at 67 for anyone born in 1960 or later. What lawmakers may opt to do is push FRA back a year or so to 68 or 69 to ease pressure on the program and allow it to keep up with scheduled benefits.
Now it can be argued that a delayed FRA is preferable to broad benefit cuts. But the reality is that for many people, an FRA of 68 or 69 will mean having to work until 68 or 69 in the absence of Social Security income.
A change like this would also put near-retirees who may have been banking on resigning from their jobs at 67 in a bad position. Hopefully, if lawmakers choose to go with this solution, they'll phase it in so that older workers don't have to scramble to alter their retirement plans.
It's one thing to change FRA on people who are in their 20s or 30s today. But for people in their 60s already, it's a very different story.
2. Increasing the amount of wages subject to Social Security taxes
Social Security gets the bulk of its funding from payroll tax revenue. The whole reason benefit cuts are being talked about is that a mass exodus of older workers from the labor force is expected to put a strain on Social Security due to a reduction in payroll tax income.
But workers aren't necessarily subject to Social Security taxes on all of their earnings. Rather, each year, a wage cap is put in place that cuts off those taxes at a certain point.
This year, the wage cap for Social Security purposes sits at $168,600, so earnings beyond that point aren't taxed. What lawmakers may opt to do is lift the wage cap or eliminate it entirely to pump more money into Social Security. This change may not impact low or moderate earners, but higher earners could lose more of their income to Social Security taxes.
3. Implementing a system of means testing for recipients
Another idea lawmakers have floated to prevent Social Security cuts is means-testing recipients and potentially reducing benefits for the wealthy. The logic would be that retirees with millions of dollars aren't reliant on Social Security anyway, so reducing their benefits to free up money for recipients who are actually in need makes sense.
But this solution is flawed for one very big reason. Social Security is not supposed to be a welfare program -- it's supposed to be a program that all workers pay into and are therefore entitled to benefit from later in life. Implementing means-testing would amount to changing the very core of Social Security.
Now it is worth noting that of the various solutions lawmakers might turn to in the course of preventing Social Security cuts, means-testing is one of the least likely to actually come to be. But it's something that has been discussed in the context of addressing the program's financial woes.
It's best to prepare for changes either way
At this point, in the context of Social Security, something's got to give. Either the program will have to reduce the amount of benefits it pays or lawmakers will have to make some sort of change to the rules to allow Social Security to keep up with scheduled payments.
Since all of the above solutions have the potential to impact workers/pre-retirees more so than current retirees (with the exception of the last one, which is the least likely), it's best to prepare for them accordingly. One thing you may want to do, for example, is get on board with the idea of retiring a couple of years later than initially planned so that a later FRA doesn't upend your plans.
Or, you can boost your savings while you're working to allow for a workforce exit at 67 without Social Security. If you're able to live off of your nest egg for a year or two before claiming benefits, you can avoid the reduction that normally applies to people who file for Social Security before FRA.
Similarly, if you're a higher earner, you may want to work with an accountant or tax-planning professional to develop a strategy that minimizes your personal tax hit in the event that the Social Security wage cap is raised or done away with completely. You may be able to soften the blow by contributing more to tax-advantaged accounts or holding investments for a longer period of time before selling them to minimize your capital gains taxes.
All told, something needs to be done to prevent Social Security cuts. The exact route lawmakers take is yet to be determined, but it's a good idea to prepare for a host of possibilities.
