We’ve written several articles here on the AgingOptions blog reporting on the predictions that the Social Security trust fund is draining fast. The actual date may vary, but according to the 2020 Social Security trustees’ report, 2034 seems to be when the well will run dry. That definitely does not mean benefits will stop, but it does mean that – unless Congress and the President act – some cuts are inevitable. But how much and for whom? This recent USA Today article by reporter Robert Powell has some answers, or at least some educated guesses.
Are the Projections of a 24 Percent Cut Accurate?
“Come 2034, incoming revenues will be enough to pay about 76 percent of scheduled Social Security benefits,” Powell writes, quoting the trustees’ report. Until then, the report says, the agency will be able to meet all its obligations. After that date, though, unless something else changes (which seems likely, as we’ll discuss below), benefit cuts would appear inevitable.
“Given that,” Powell asks, “how might different generations plan for this? Should they plan for a 24 percent decline in their scheduled benefit? Should they not factor Social Security benefits into their retirement income plan at all? Or might they do something else?” The financial experts Powell consulted for his article say that the projections should cause future retirees to plan and save more carefully, although today’s retiring Baby Boomers would likely see no benefit reduction even if Congress fails to act.
Policy-Makers Have Several Possible Fixes Available
For his USA Today article, Powell talked with several experts, including certified financial planner Joe Elsasser. “Though I think it far more likely that some combination of reforms will eliminate the need for cuts of the magnitude the trustees report suggests,” Elsasser told Powell, “people should be aware of the impact a cut would have on their overall financial situation.”
The reforms Elsasser speaks of should sound familiar to anyone who has been tracking this issue. Congress could propose a hike in the Social Security tax. There could be a cut in benefits, probably in the form of a later retirement age than the current age of 67. Congress could also decide to lift the lid on how much income is subject to Social Security withholding. But, even with an array of choices, Powell writes, “to date, there seems little to no interest on the part of lawmakers to tackle the coming shortfall between incoming revenue and scheduled benefits.”
If nothing happens and the paralysis in our nation’s capital persists, what then? According to Marcia Mantell, a retirement consultant, the answer depends on how old you are. “The implications with Social Security’s solvency tend to fall on generational lines,” she explains. Here’s how Mantell and others who spoke with USA Today predict any cuts might impact future beneficiaries.
Baby Boomers Have Little to Worry About
Estimates suggest that 10,000 Baby Boomers retire every day, and the youngest of this huge post- war cohort are all 55 and older. For them the news seems good. “Social Security benefit estimates for those born 1946 through 1964 should be on target,” Mantell told USA Today, “and will be unlikely to be reduced if Congress fails to put a solution in place to shore up the reserve account within the overall trust fund, or fails to increase payroll taxes to support the commitments made to these retirees.”
Financial planner Elsasser agrees, but is somewhat more cautious. “Baby Boomers should plan for benefits as they are projected,” he says, “but stress test for a benefit cut.” That way, by planning for a possible worst-case scenario, Boomers can be better prepared. Elsasser’s biggest reason for telling Boomers they have little to fear is because Social Security has never made immediate across-the-board reductions in benefits.
Stress-Testing Retirement Plans Helps Boomers Prepare
“Historically benefit cuts have been phased in over time,” Elsasser told Powell. “Some of the reforms that were put in place [in 1983] are still being phased in today, such as the increase in full retirement age from 65 to 67.” But by following Elsasser’s suggestion to “stress-test” your retirement –which to us is an excellent argument for creating and utilizing a financial dashboard – Boomers can practice what they would change if sudden cuts are implemented.
“If the cuts to your plan are too painful to bear if they do materialize, then make smaller changes now and monitor the situation,” he says. “Smaller cuts to your lifestyle sooner will hurt less than larger ones later.”
Those in Gen X Should Plan on a 10 Percent Benefit Reduction
For the generational cohort following on the heels of the Baby Boomers – those Gen Xers born between 1965 and 1980 – planning takes on added importance with the precarious state of Social Security. For those in Gen X, now in their 40s and early 50s, the USA Today article suggests planning on a 10 percent reduction in Social Security benefits. Elsasser recommends Gen Xers adjust their retirement projections to include lower Social Security payments, and then plan accordingly with savings and lifestyle adjustments.
Fortunately, Mantell says, there’s good news even in the bad news for future Gen X retirees. “For the 65 million of you who are between the ages of 41 and 56, you are in your peak earnings years,” she told USA Today. “And that means you can and will need to ramp up your personal savings. You have time on your side, and every $1,000 or $2,000 or $5,000 you can sock away now will increase your income for retirement and balance out the trade-offs that you may have to make.”
USA Today’s Advice to Gen Z and Millennials: Chill
What about today’s workers in their 20s and 30s? How much should the problems of Social Security worry them? According to USA Today, the answer is, not much. “Experts say it’s too early for Millennials and Gen Zers to worry about Social Security cutting benefits,” says the article. As Mantell puts it, “You are too young to confidently guess how Social Security will pay benefits. Half of you don’t even yet have your 40 credits for eligibility. So, your focus will be well-served to be on you.”
Elsasser shares that point of view. As he told USA Today’s Powell, “Though it’s important for everyone, particularly if you are under 40, your focus should continue to be on improving your skills, education and training in order to maximize your earnings potential through your peak earnings years. Saving consistently in vehicles you won’t touch until retirement is important as well. At minimum, be sure to take advantage of any company matches or incentives.”
But Should We Worry at All?
Because Social Security is so vital to tens of millions of beneficiaries, no one seriously thinks Congress will simply sit on its hands and let the benefit axe fall in 2034. “All this planning for a potential cut in benefits might be much ado about nothing,” says the USA Today article. Powell spoke with Michael Finke, a professor at the American College of Financial Services. “I don’t know any expert in Social Security who believes that Congress will allow a significant cut to beneficiaries,” Finke says.
“Politicians face a no-win situation where making changes today to shore up Social Security is painful, because it will either mean higher taxes or lower benefits, but the alternative to making no changes is worse – having a big block of voters see a cut in their retirement income.” Eventually, say Finke and others, the power of the ballot box will motivate Congress to increase payroll taxes, increase the claiming age or change the inflation adjustment.
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(originally reported at www.usatoday.com)