Both current and future retirees need to be aware that the time is running out before Social Security benefits can be substantially reduced. The Social Security trust fund is projected to run dry as before in 2035, meaning that by the time the current 52-year-olds reach their full retirement age, they could receive much smaller benefits than they were promised.
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Here’s what needs to happen to prevent a 24% social security cut
How much smaller? If the trust fund is withdrawn and pension benefits can be paid out of only current tax income, pensions will seek a 24% cut. With the average Social Security benefit already providing just $ 1,503 per month, such a substantial decline could lead to a major decline in livelihoods.
The good news is that there are some possible solutions to prevent this. But the bad news is that there are really only three options – all of which are not politically popular. Here are the three possible fixes for Social Security financial issues.
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1. Change the full retirement year
When Social Security was first created, FOL of full pension (FRA) – the age at which a retiree could receive his or her standard benefit – was 65. The 1983 Social Security Amendments changed FRA to 67. , phasing in the change gradually. FRA pushing back was considered a necessary part of a compromise to boost Social Security because life expectancy had increased and people received many more years of benefits.
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Now, some lawmakers are of the opinion that history should repeat itself and FRA should be reinstated – perhaps up to 70. This would be a de facto benefit cut for everyone, as it would eliminate the opportunity to increase benefits by earning delayed pension credits. . And those who did not delay retirement after the new FRA would see a smaller check due to early fines.
While returning full retirement age would help repair funding deficits, there is strong opposition. And the Brookings Institution warns that gains in life expectancy are most prevalent among high earners, so those with lower incomes would take the run of the hit.
2. Cut benefits
While changing FRA is a de facto benefit cut, there are other possible reductions on the table as well.
Legislators could change the way social security increases are calculated. Currently, they are determined based on changes in the consumer price index for urban wage representatives and church workers, but that could instead be switched to Chained CPI. This is another price index that assumes that customers adjust behavior by exchanging the products they buy as prices go up. If this change happens, it will help to save money, because benefits increase more slowly – but if benefits already lose purchasing power, it can cause financial pain for retirees.
Benefits could also be cut if lawmakers change the formula used to calculate them. One proposal on the table is to determine the standard payout of a pension by basing it on the average salary of a 40-year-old highest-earning year (after adjusting for inflation) instead of 35 years, which is the current rule. This may mean that more people have years of $ 0 pay than years in lower earnings.
Implementing these cuts may be easier than changing the entire retirement year, as they are more like technical tweaks. In fact, they can largely not be noticed because many people do not know the intricacies of how increases are calculated or how the benefit formula works. But, make no mistake, the short cuts would have a substantial impact.
3. Increase taxes
While benefit cuts will almost certainly be part of any social security repair plan, left-wing lawmakers generally prefer to increase revenue to keep benefits the same or provide extended benefits.
Taxes could be greatly increased, with the Social Security trustees’ report indicating an increase of 3.14 percentage points to the tax authorities would be needed to provide sufficient funding if they are implemented immediately. Most Democratic proposals, however, do not give tax increases to everyone, but instead change the way the rich become taxed. Currently, workers pay taxes only up to an annual wage tax limit and receive benefits based on the amount they pay. Some proposals would require higher earners to pay tax on more of their income or even all of it – and not necessarily increase benefits.
Tax increases are unlikely to be popular, and if they come without a corresponding increase in benefits, they will change the way Social Security has always worked, because it has always been a deserved benefit.
Will Social Security find a financial fix?
Although the Social Security Trustees have been warning for years that the day of reckoning is getting closer, lawmakers have not been able to pass compromise legislation on the serious financial shortcomings of Social Security since the early 1980s. And with partisanship at record levels, they are unlikely to be able to do so at any time.
Lawmakers may simply throw up their hands and approve extra spending on Social Security without making any of these difficult choices. But this would also be a fundamental change in the way the program is structured. It is also unsustainable in the long run with the country falling deeper and deeper into debt, and it is unclear if this idea could get majority support.
The ultimate rule is, without action, benefit cuts are inevitable – and most actions will involve cuts as well. That current and future retirees need to increase their savings, make smart investments and make sure they are well prepared with reduced social security checks, as that is likely to become a reality within 15 years or less.
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