Here’s how to protect your retirement against potential benefit cuts.
Social Security has been struggling for years, but as we inch closer to the date that the trust funds will run dry, the situation is becoming even more dire.
Every year, the Social Security Administration Board of Trustees releases a report detailing the state of the program and predictions for the future. As expected, the program’s trust funds are still struggling, and benefit cuts could be looming if Congress can’t find a solution soon.
But just how soon could those cuts happen? And should you start taking benefits sooner than anticipated to protect your retirement? Here’s what you need to know.
What’s happening with Social Security?
First, it’s important to understand why Social Security is having cash-flow problems in the first place.
The program relies primarily on payroll taxes to fund benefits, and that money is then funneled out to current beneficiaries. Currently, though, Social Security’s income sources are falling short of its expenditures — meaning there’s more money flowing out of the program than coming in.
Fortunately, the Social Security Administration (SSA) has two trust funds it can lean on if it doesn’t have enough cash from taxes and other sources of income. These trust funds are the Old-Age and Survivors Insurance (OASI) fund and the Disability Insurance (DI) fund.
The SSA has been taking money from the trust funds to avoid cutting benefits for now, but eventually, those funds will run out. According to the SSA Board’s latest estimates, both funds will likely be depleted by 2035. If nothing changes by then, the program will only be able to pay out what it’s receiving in income — and those income sources are only expected to cover 83% of future benefits.
At this rate, then, beneficiaries could see their benefits slashed by 17% within the next 11 years.
Should you take benefits early to prepare?
This can be startling news if you’re on the cusp of retirement. Social Security is a lifeline for many retirees, and the thought of benefits potentially going away could wreak havoc on your financial future.
However, even if the trust funds do eventually run out, benefits are not going away entirely. Again, the program will still have enough cash to cover 83% of future payments, according to the most recent estimates. As long as workers continue paying taxes, there will always be at least some money to pay out in benefits.
Because Social Security is not going away, taking benefits early may not necessarily be an advantage. In fact, you may actually be better off delaying benefits to help offset potential cuts.
When you file before your full retirement age, your benefit is permanently reduced. By filing as early as possible at age 62, your payments will be lowered by up to 30% for the rest of your life. If benefits are then cut by an additional 17%, it will be even more difficult to rely on your monthly checks.
On the other hand, if you delay claiming benefits until age 70, you’ll receive your full benefit plus a bonus of at least 24% per month. This bonus is also permanent, so if benefit cuts become a reality, these larger checks can help cushion the blow.
Choosing the right claiming age
The right age to begin claiming will depend on several factors, but it can be helpful to think about how much you’re going to be relying on your benefits in retirement.
If you have plenty of savings, it may not hurt to claim early — even if the program faces benefit cuts in the future. Potential benefit cuts could slash your payments, but if Social Security isn’t going to be a major source of income, filing early can help give you a jump-start on retirement.
Delaying claiming can be a smart move if you are going to be relying heavily on your benefits. Again, waiting until age 70 can earn you a bonus of 24% or more, which can amount to hundreds of dollars per month. If benefit cuts might threaten your retirement, delaying claiming can help protect your finances.
Social Security may be struggling, but it’s not going away. By planning accordingly and claiming at the right age for your situation, you can ensure you’re as prepared as possible no matter what happens with your benefits.
