According to financial experts, it’s not yet time to panic, despite last week’s news about an early cut on Social Security benefits. This caused many Americans to feel concerned, especially those with retirement plans affected by COVID-19.
If Congress doesn’t act on the long-term funding shortfall of the program, the benefits will be cut a year earlier, that is by 2034, according to the Social Security and Medicare trustees report. Without any action from Congress, only 78% of the retirees and disabled beneficiaries’ guaranteed benefits will be paid from Social Security’s consolidated trust funds. In other news sources, the percentage is even lower at 75%.
The cause of the early depletion of funds is not a mystery. With the pandemic causing economic turmoil, employment rates have continued to decline, decreasing the revenue from payroll taxes as well.
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However, the early cuts on the Social Security benefits don’t mean the funds are drying up. A financial and planning firm in Chicago, Monotelo Advisors, shared that possibility is far from happening.
If the current wage taxes will only be the source of Social Security funds by the middle of the next decade, around 75% of the guaranteed benefits can still be paid by the Social Security Administration, Monotelo shared in their website.
According to Monotelo, “While a 25% reduction in benefits could significantly hurt the retirement plans of those who are relying on their Social Security benefits, it is far less damaging than the program being shut down entirely.”
Scott Thoma who works as a retirement strategist at Edward Jones expressed the same stance. He said that the depletion of Social Security funds by one year doesn’t necessarily translate to the Social Security’s bankruptcy.
According to Thoma, “There are changes that can be made to put the program on solid footing. In order for the program to remain fully funded through the 75-year projection period (they run it for 75 years — through 2095), payroll taxes would need to rise about 3.36%, or just under 1.7% for both the employer and employee, to fully fund the program. If no changes are made, benefits would need to be cut by 24% starting in 2034 (they would be able to pay 76 cents for every dollar of benefits).”
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This can only happen if there is no action from the government to settle this Social Security concern. However, measures such as increasing the full retirement age, changing the reduction formulas, and removing the ceiling on taxable earnings can be done.
“The key thing to remember here is that Social Security is not necessarily going bankrupt,” Thoma added.
The possibility of getting decreased benefits may lure some retirees to apply for benefits as soon as they are eligible before the reserves are gone. However, this might not be the best plan.
“If you start taking your benefits as soon as allowed, they will be reduced to 70% of your full retirement age benefit,” Monotelo noted. “Comparing this to the 75% that could be received even after the fund runs out, you would still be hurting your retirement by applying early.”
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