Social Security Benefits Could Shrink in 10 Years. How to Plan.

Nov 1, 2023Personal Finance, Retirement Planning

If the Social Security trust fund runs dry in 2033—which it is projected to do if no action is taken—a couple with average earnings would lose $17,400 in benefits that year alone, according to a new report.

That’s a significant sum. But preretirees shouldn’t let fears of possible cuts push them to claim benefits earlier than planned, experts say.

The report, by the nonpartisan Committee for a Responsible Federal Budget, focuses on the Social Security and Medicare Trustees’projection that the retirement trust fund will reach insolvency in 2033, one year earlier than previously expected.

Social Security has been dipping into its reserves to make up the difference between the revenue it collects and the amount it pays out. Yet those funds are due to run dry in the next decade unless Congress moves to reform the system. Barring action, retirees, dependents, and survivors would see their benefits cut by a projected 23%, according to the trustees’ calculations.

However, most observers expect that Congress will act to shore up the trust fund and avert such cuts. While fixing Social Security’s shortfall will require changes to the program, such as possibly raising the full retirement age, any such changes would likely exempt both current beneficiaries and those within at least a decade of retirement.

“They will not let it run dry,” says Ron Mastrogiovanni, CEO of HealthView Services, a firm that provides retirement healthcare-cost tools and data to financial advisors. “And they will not impact someone who is close to or ready to file.”

Last time Social Security faced insolvency, in 1983, Congress exempted current beneficiaries from changes, which included a gradual increase to the full retirement age for claiming benefits from 65 to 67 for those born in 1960 and after.

Rather than let the looming shortfall dictate when to claim, those nearing retirement should consider their likely life expectancy, Mastrogiovanni says. Those in poor health may receive more over their lifetime by claiming earlier, while those in average to good health should consider claiming later, if possible, for a higher lifetime benefit. (Regardless of health status, people with little retirement savings may have no choice but to claim early.)

For someone born in 1960 or later, claiming at 62 means locking in a 30% reduction in benefits; wait until 70 and you qualify for 124% of the benefit you’d receive if you had claimed at the full retirement age of 67.

Numbers aside, uncertainty about Social Security’s future is frightening. But it’s important not to panic and make an emotional decision, says Martha Shedden, co-founder and president of the National Association of Registered Social Security Analysts, which provides benefit claiming analyses.

Shedden is in the camp that doubts benefit cuts will come to pass. But even if they do, she notes, a 23% cut to a bigger check will leave more in your pocket than a 23% cut to a smaller one.

“The bottom line is, the earlier you collect, the less you will get for the rest of your life,” she says.

The brunt of future cuts to Social Security will fall on younger people, who should prepare to receive less than current and near-retirees, Mastrogiovanni says. For example, it’s reasonable for millennials to prepare for a 20% reduction to current benefits, he says. To do that, a 35-year-old earning $100,000 would need to add $2,543 to their annual savings from now until full retirement age to generate the equivalent income “lost” from a reduction in Social Security benefits consistent with the program’s solvency expectations, according to a report last year by HealthView Services.

The bottom line is, the earlier you collect, the less you will get for the rest of your life

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021.