By the time working Americans retire, a majority will be, in at least some capacity, reliant on Social Security income to make ends meet. Currently, more than three out of five seniors relies on their monthly payout for at least half of their income, without around a third (34%) leaning on the program for at least 90% of their income. Future retiree reliance is expected to be a bit lower, according to a Gallup survey, but still substantial.
However, America’s most important social program is on shaky ground, and it’s today’s working Americans, along with pre-retirees, who could wind up paying for it. Whether you realize it or not, there’s not one, two, or three, but up to four different ways your Social Security benefits could be reduced in the years and decades to come with virtual no action by lawmakers on Capitol Hill.
1. Full retirement age increases reduce aggregate payouts
Back in 1983, the Reagan administration passed the last major overhaul of Social Security. Facing a long-term actuarial deficit that was only about a third as big as it is now, the Amendments of 1983 introduced new means to generate income, as well as long-term ways to reduce the costs of the program. One of the means to control the latter was a gradual increase to the full retirement age.
Your full retirement age is the age, determined by your birth year, at which the Social Security Administration deems you eligible to receive 100% of your full retired worker benefit. If you claim benefits prior to reaching your full retirement age, you effectively accept a permanent reduction in your monthly payout. On the other hand, if you wait until after your full retirement age, you can actually further boost your monthly stipend.
When passed in 1983, the Amendments mapped out a two-year increase in the full retirement age, from 65 to 67, over a span of four decades. Right now, the full retirement age is increasing by two months per year, until 2022 where it’ll cap out at age 67. As the full retirement age increase, future retirees have to either choose to wait longer to receive their full benefit, thus reducing the number of years they’re collecting a benefit, or accept a steeper reduction to their payout if they claim early, hurting their aggregate payout over the long run. No matter how you look at it, aggregate benefits paid are reduced for future retirees.
2. Taxation of benefits is growing
Another component to the Amendments of 1983 was the introduction of the taxation of Social Security benefits. This new revenue stream applied ordinary federal income tax on 50% of single filers’ or couples’ Social Security benefits if they respectively earned more than $25,000 or $32,000 in adjusted gross income (AGI). A second tier was added in 1993 under the Clinton administration that allowed 85% of Social Security benefits to be taxed if a single filer earned above $34,000 in AGI, or over $44,000 for couples filing jointly.