By Joe Elsasser, CFP
If you’re nervous about the future of the Social Security program, you’re not alone. In a survey from Nationwide, 71% of adults of all generations said they are more worried now that Social Security will run out of funding. It’s no wonder, the 2020 Social Security Trustees report indicated that funds are likely to run out by 2035. At that point reserves will be depleted and 79% of scheduled benefits will be paid out with income from taxes. This doesn’t even consider the potential impact of the pandemic.
One way to ease your anxiety about Social Security is to see exactly how a cut to benefits would affect your specific situation. This calculator can show you the impact. Simply enter your year of birth, benefit amount at your full retirement age, percentage of your benefit cut, and year that the benefit cut occurs to calculate your claiming strategy.
It might seem like you should claim early before the cuts to Social Security can take effect, but that is very rarely a good idea. Most people who are relatively healthy can get more by delaying, even when you factor in potential cuts to Social Security benefits. Here’s an example.
Let’s say you’re a healthy female who will turn 62-years-old this year. At your full retirement age, you will receive $2,000/month in benefits. For our example we will say that benefits will be cut by 25% in 2035 as projected in the 2020 Social Security Trustees report.
The key is to project the impact out over your lifetime. A female in average health who is 62 today has a 64% chance of living to age 85. If you claim early your lifetime total benefit amount will be $350,364.69. If you delay until age 70, your lifetime total benefit amount increases to $382,628.37. Even in the presence of a benefit cut, the impact is not enough to suggest that you should claim early.
It’s also important to remember that industry experts are working on solutions to shore up the Social Security program. Experts have suggested:
· increasing the full retirement age to 69
· increasing the Social Security payroll tax rate to 14.8%
· adapting a newer measure of inflation (Chained CPI-U) for Social Security benefits
All these solutions would help solve the Social Security funding issue, and benefit cuts wouldn’t be necessary. Many Americans rely on Social Security for income in retirement. I wouldn’t be surprised to see any or all the changes outlined above implemented in the next few years. The most important thing to remember is that it’s never a good idea to make financial decisions out of fear. Use this calculator to get an idea of the impact that Social Security benefit cuts would have on the total value you receive with Social Security and start a conversation with your financial advisor about how to prepare for the days ahead–no matter what they bring.
About the author: Joe Elsasser, CFP®
Joe Elsasser, CFP® is the founder and president of Covisum®, a financial tech company focused on creating software solutions, practice management and marketing resources to help advisers and financial institutions grow and improve lives through better retirement decisions. Covisum helps financial advisers serving mass-affluent clients in or near retirement and powers some of the nation’s largest financial planning institutions.
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