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Will Social Security Cut My Benefits?

By Matthew Frankel, CFP® – Mar 21, 2016 at 7:21PM

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Should you expect Social Security benefits to be lower by the time you need them?

Photo: Wikipedia user Djembayz

Social Security is paying out more in benefits than it is taking in from taxes. Obviously, this is not a sustainable situation -- unless something is done, Social Security will run out of money. In fact, the Social Security trustees' report projects that the trust funds will be completely depleted by 2034. If you're still years out from retirement, Social Security will probably look somewhat different by the time you need it. Does this mean you should expect lower benefits?

There are several kinds of benefit cuts
The most obvious type of benefit cuts would involve reducing everyone's Social Security benefit by a certain percentage or dollar amount. However, an across-the-board benefit cut like this is extremely unpopular on both sides of the political spectrum, and is therefore unlikely to get any serious consideration.

However, there are several other ways to reduce the amount of benefits being paid out. Here are some of the ideas that have been proposed in recent years:

  • The full retirement age could be raised. Recent proposals call for gradually raising the retirement age to 68 or 70.
  • The way Social Security calculates cost-of-living adjustments (COLA) could change to a slower-growing index than the CPI we currently use.
  • More years could be taken into account when computing benefits. Social Security benefits are based on  an inflation-adjusted average of workers' 35 highest-earning years. Changing this to say, 38 years, would bring down career average incomes and would thereby reduce the benefits of future retirees.
  • Benefits could be cut, but just for higher income workers. The current formula for calculating Social Security benefits already favors lower-income workers, so it could potentially be adjusted even more in that direction.

...but they are unpopular
A study by the National Academy of Social Insurance found that most Americans are opposed to any reforms to Social Security that involve cutting benefits. For example, only 35% favor a small, gradual increase in the full retirement age to 68, and even fewer support an increase to 70.

On the contrary, most Americans actually support increasing benefits, even if it means higher taxes. For example, 83% of Americans are in favor of gradually increasing the Social Security tax to 7.2% for both employers and employees, from the current rate of 6.2%. And 80% of the population is in favor of eliminating the cap on wages that are subject to Social Security taxes. Currently, only the first $118,500 of earnings are taxable for Social Security purposes -- obviously, opening it up to all income would increase the money flowing in to the system.

The survey found that the reform package favored by the most Americans contains the following items:

  • A gradual increase in the Social Security tax rate to 7.2%.
  • Eliminating the wage cap.
  • Leaving the full retirement age alone at 67.
  • Increase Social Security's cost-of-living adjustment to better reflect rising costs experienced by seniors (such as rising healthcare costs).
  • Raise the minimum Social Security benefit, so no retirees who worked for 30 years are living below the poverty line.

As you can see, more of the population favors increasing benefits than decreasing them. In fact, another package that contained a $65 monthly across-the-board increase in benefits was a close second in popularity. So, it's safe to say that most of the American people want to preserve and strengthen Social Security -- and are willing to pay to make it happen.

Still, anything can happen
Across-the-board benefit cuts are highly unlikely, but the other forms of benefit cuts listed here are entirely possible. Although I believe that a tax increase and a removal of the earnings cap are the most likely ways Social Security's funding gap will ultimately be solved, benefit cuts can't be ruled out, especially if there is a Republican president and/or a Republican majority in Congress.

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