If you haven’t retired and you’re counting on a specific amount of Social Security income to fund your post-career lifestyle, you probably shouldn’t allocate those dollars just quite yet.
Why? Because a projected future funding shortfall to Social Security’s Trust Fund (estimated to occur in 2034) means some changes will have to take place for future retirees to receive 100% of their promised benefit.
Here are three potential adjustments lawmakers could make to fix the shortfall – and how they might impact your retirement plans.
Another increase to the Full Retirement Age
It’s hard to believe, but Social Security was once an untaxed income source for retirees, with a Full Retirement Age (FRA) of 65 that remained unchanged for decades.
But with legislation passed in 1983, the FRA began its creep up to age 66 and is now working its way up to 67. And with longer average lifespans, an influx of millions of additional retirees, and a funding shortfall that’s due to hit in as little as 16 years, a sudden FRA increase could happen.
Make no mistake, raising the FRA to, say, 68, is a two-pronged cut to benefits. That’s because, for FRA filers, it decreases the number of years they’ll receive Social Security.
And for those who are willing to wait until age 70 to take advantage of the extra 8% yearly add-on to benefits? It subtracts a full year from that accumulation, as well.
The payroll tax cap could be increased or eliminated
If you have a higher than average income, the tax of 6.2% that funds half of Social Security (your employer pays the other half) is levied against the first $128,400 (2018) you earn.
Simply put, every dollar you earn after your first $128,400 comes in Social Security tax-free.
Critics of the current cap rate argue that someone earning $120,000 a year is paying a larger percentage of their income in Social Security taxes than a person who earns $250,000 a year.
Proponents of a lower cap rate question why high earners, who as of 2018 can receive a maximum of $2,788 per month in Social Security benefits, should be required to pay more now and receive nothing extra later.
So, what if lawmakers decide to eliminate the cap altogether, or bump it way up, to, say, $250,000?
Raising the cap amount would certainly pad the fund’s reserves (experts disagree for how long), but the downside, certainly for high earners, is that raising the tax cap is likely to be paired with other changes, specifically, “means testing” (see below).
For high-income earners who are still a few years from retirement, applying the Social Security tax to all (or significantly more) of your income could, over time, result in tens of thousands of extra dollars being deducted from your paycheck that you’re unlikely to ever see again.
If you’ve saved well for retirement, concerns about the possibility of future “means testing” that decreases the amount of Social Security you receive, or even disqualifies you from the program altogether, are legitimate.
There are a number of possibilities, including a reduction in benefits for people with incomes over a certain amount; and the creation of an asset-based cap (for instance, anyone with total assets over $3 million would be ineligible to receive any Social Security).
The Simply Money Point
As we saw in 2015 with the cancellation of “File and Suspend”—a popular Social Security filing loophole that gave some qualified retirees tens of thousands of dollars in additional benefits over the course of long retirements—changes to Social Security could be implemented with little or no warning and have a drastic impact on your retirement income. However, if you’re over age 50 the likelihood of changes affecting you are lower.
If you’ve saved well, are within 5 years of retiring, and want to learn more about Social Security, register for one of our free workshops coming up during the week of August 6th.
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