The Social Security Administration (SSA) recently released its 2022 Board of Trustees report, which provides a snapshot of the program's health and financial status. More importantly, it also includes information about whether benefits could be cut in the relatively near future, as well as when those cuts might happen.
Whether you're already retired or are planning to start taking Social Security soon, there's some good and bad news about your future benefits.
The bad news
The bad news is that, like in previous years, the SSA still expects to cut benefits, to an extent. Social Security benefits are funded primarily through payroll taxes, but in recent years, that income hasn't been enough to cover the program entirely.
This is partly due to the fact that there are so many baby boomers retiring, and there's more money flowing out of the system in the form of benefits than there is coming in from payroll taxes. Also, as retirees live longer, the SSA is paying out more in benefits than it has in previous decades.
As a result, the SSA has been tapping its trust funds to cover the deficit. Those funds will eventually run out, though, and the most recent report estimates that will happen by 2034. At that point, the money coming in from payroll taxes will only be enough to cover around 77% of projected benefits.
In other words, if lawmakers are not able to find a solution to this problem by 2034, your future benefits could potentially be cut by up to 23%.
The good news
While a 23% benefit cut may not seem like good news, the positive aspect is that the situation hasn't worsened. Over the past two years, many experts — including the SSA itself — raised concerns that the COVID-19 pandemic could accelerate the trust fund's depletion. Many older Americans chose or were forced to retire early due to the pandemic, and many younger workers lost their jobs or could not work.
As a result, there was more money being paid out in benefits than usual, as well as even less income coming in from payroll taxes. Some worried that this might mean benefits would be slashed sooner than expected or the cuts could be more drastic.
However, while things could always change, the SSA notes in its most recent report that it believes “the pandemic will have no net effect on our long-range projections.” Its current predictions are also virtually unchanged from last year, when it expected that benefits would be reduced up to 24% by 2033.
What does this mean for you?
Nobody knows for certain whether Social Security benefits will actually face cuts. There's a chance that lawmakers could find a solution before 2034, and retirees may not need to worry about benefit reductions at all.
That said, it's wise to prepare for potential cuts, just in case. If you haven't retired yet, consider whether you can increase your savings even slightly. If benefits are cut, a healthier nest egg could help cushion the blow.
You could also consider delaying benefits if you haven't begun claiming yet. Waiting even a year or two to file for Social Security can result in collecting hundreds of dollars more per month, which can go a long way if benefits are reduced in the future.
If you're already retired, be prepared for potential benefit cuts. If you're relying heavily on Social Security, it could be smart to reduce your spending or pick up some part-time work to reduce the impact of potential cuts. Otherwise, just keep these changes on your radar over the next decade or so.
Benefit cuts can be concerning, but Social Security isn't going away completely. By being aware of how the program could change and preparing accordingly, you'll be ready no matter what happens with your benefits.
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