Now is the proper time to work on fixing Social Security. Politicians on both sides of the aisle have said that the retirement age will not be raised, but people who are planning their financial futures may want to ignore these claims.
As a general rule, if you are in your 40s now, you should plan as if the full retirement age, which is currently 67, could go up by one year by the time you hit it.
If you are in your 20s, you might want to expect a raise every two years. A new white paper from Health View Services, a business that makes software for financial planners, gives this advice. The paper looks at the upcoming funding gap for Social Security.
The age at which a person can start getting their full Social Security payments is called their “retirement age.” You can start getting benefits as early as age 62, but if you do so before age 67, you will get less money.
A lot of people are talking about Social Security these days, especially since the election in November is coming up.
Both Vice President Kamala Harris and former President Donald Trump have said they do not want to see cuts to Social Security payments and do not want to see the retirement age changed.
But the program’s trust funds are likely to run out within the next ten years, so Congress needs to take steps to make sure it will continue.
Benefits would be cut by 21% automatically in 2033 if nothing is done by lawmakers. This would affect both present and future beneficiaries.
Proposed solutions to the Social Security shortfall
For most people, this kind of a cut is impossible because it would mean losing about $250,000 in lifetime benefits for a couple who plans to retire in the next ten years.
The white paper looks at seven possible ways to fix the funding gap, with each having a different level of effect on the deficit. As an example:
–Eliminating the maximum taxable earnings limit for payroll taxes on high earners could cover 70% of the shortfall.
– Reducing annual cost-of-living adjustments (COLAs) by 0.5% would address 28% of the deficit.
– Raising the payroll tax rate from 6.2% to 8% for both employees and employers would eliminate the entire shortfall.
If the retirement age is raised gradually starting in 2040, adding one year would only cover about 15% of the funding gap. As strange as it may seem, such a big change would only have a small effect.
This is because people would not really notice the change until they retired years later. Changes to tax policies or lowering COLAs, on the other hand, might have an instant effect.
It is still not clear if Congress will actually raise the retiring age. Based on what has happened in the past, Ron Mastrogiovanni, CEO of HealthView Services, thinks that lawmakers will probably go this way.
He points out that the retirement age was raised to 67 for people born in 1960 or later by a law passed in 1983, after the trust fund ran out.
When there was a deficit in the trust fund, the first thing that lawmakers did was raise the full retirement age for Social Security. This seems like the most possible outcome. The numbers show that they have to do more than that, but that is the one that seems most likely to happen.
If the retirement age changed, it would probably have the biggest effect on people under 40. This is because Congress would have to give people plenty of time to change how they plan to retire.
A new budget plan from Republicans in the House called for “modest adjustments” to the retirement age. It was made clear that these changes would not affect people who are already close to retirement.
But young Americans should be honest about the fact that Congress is under a lot of financial stress because people are living longer and getting benefits for longer amounts of time.
Mastrogiovanni tells younger Americans to think about the chances that things will change in the future that could hurt their benefits. He says that planning for a higher retirement age now can help make up for problems that might come up later.
The most important thing to remember is that these possible changes should be taken into account when planning for retirement.
The white paper says, “Clients should plan to pay more into the system while they are working and get slightly lower benefits when they retire.”
Smaller extra contributions to retirement savings will help protect retirement plans in case Social Security benefits are smaller in the future, but not so much that they become unusable.
