If no adjustments are made, Social Security could face insolvency by 2033, which could lead to substantial reductions in benefits for future retirees. According to a new whitepaper, this scenario could place severe financial strain on Americans who rely on Social Security as a primary retirement income source.
The report, titled “Funding Social Security: Ranking the Cost of Proposed Changes on Americans Planning for Retirement,” was published by HealthView Services and evaluates several strategies to improve Social Security’s financial stability.
It considers the implications for both mass affluent and average-income Americans, especially those nearing retirement in 10 to 25 years.
Potential Impact on Social Security Benefits
HealthView Services’ analysis highlights the significant impact of a potential 21% reduction in Social Security benefits if funding challenges go unaddressed.
For instance, a mass affluent couple retiring in 25 years could lose up to $908,000 in Social Security benefits, while an average-income couple with just 10 years until retirement might see a reduction of $252,000 over their lifetime.
Effect of Changing the Full Retirement Age
The report also explores how increasing the full retirement age (FRA) could lessen the blow of these potential losses.
For instance, raising the FRA from 67 to 68 would reduce the lifetime benefits of a mass affluent couple by approximately $325,000, while an average-income couple would experience a $249,000 reduction.
Delaying retirement by just one year could result in lifetime benefit reductions of $125,000 for mass affluent couples and $95,000 for average-income couples.
Public Expectations for Congressional Action
Research indicates that Americans are increasingly aware of Social Security’s financial challenges and are looking to Congress for solutions. A survey by the National Institute on Retirement Security (NIRS) found that 87% of respondents believe Congress should act now to address Social Security’s funding shortfall.
Meanwhile, a study by the Peter G. Peterson Foundation showed that, although only 30% were aware of possible benefit cuts, 97% of informed respondents urged lawmakers to strengthen Social Security.
HealthView Services’ CEO, Ron Mastrogiovanni, noted, “This paper helps working Americans, advisors, and the financial sector understand how proposed changes could affect retirement plans. Congress will face hard decisions—whether to reduce benefits or raise taxes—each of which will have significant costs for future retirees.”
Alternative Solutions to Address Social Security Shortfall
Several other proposals to reduce Social Security’s shortfall are also under consideration. One potential solution involves reducing the annual cost-of-living adjustment (COLA) by 0.5%, which is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
This adjustment reduction would cut the lifetime benefits of a mass affluent couple retiring in 25 years by about $287,000, while an average-income couple nearing retirement could see a loss of nearly $100,000.
The report also reviews other measures, such as decreasing spousal benefits from 50% to 33%, which, although minimally impacting Social Security funding, could significantly reduce the lower-earning spouse’s benefits by close to $250,000 for mass affluent couples 25 years from retirement.
Another option explored in the whitepaper is removing the earnings cap for high-income Social Security contributors. Although this change would not directly impact average-income or mass affluent couples, it would mean an extra $252,000 in contributions for a couple earning $500,000 annually without additional benefits.
Analysis from the Society of Actuaries suggests that removing this earnings cap could potentially cover 70% of Social Security’s shortfall.
Increasing Payroll Tax Caps
An alternative proposal involves raising the payroll tax cap from 6.2% to 8% for American workers. If implemented, mass affluent couples could experience a net income reduction of $133,000 over the next 25 years, whereas average-income couples would face a $22,000 decrease by retirement in 10 years.
Mastrogiovanni remarked, “The cost to address Social Security’s funding issues will largely depend on the specific proposals enacted, as well as variables like income, life expectancy, and claiming age. However, modestly boosting retirement savings now could help individuals maintain their financial security even if Social Security benefits decrease, ensuring the program remains an essential retirement income source.”
| Proposal | Target Group | Projected Impact on Benefits | Lifetime Benefit Reduction | Additional Contributions Required |
|---|---|---|---|---|
| 21% Benefit Reduction | Mass Affluent Couple | Retirement in 25 Years | $908,000 | N/A |
| Full Retirement Age Increase | Average-Income Couple | Retirement in 10 Years | $249,000 | N/A |
| Reduced COLA by 0.5% | Mass Affluent Couple | Throughout Retirement | $287,000 | N/A |
| Spousal Benefit Reduction | Lower-Earning Spouse | 25 Years to Retirement | $250,000 | N/A |
| Removal of Earnings Cap | High-Income Earners | Earning $500,000 Annually | N/A | $252,000 |
| Payroll Tax Cap Increase | Mass Affluent Couple | Over 25 Years | $133,000 | Higher Tax Contributions |
FAQs
What will happen if Social Security becomes insolvent by 2033?
If insolvency occurs, Social Security benefits could be reduced by 21%, which would impact retirees’ income and financial security unless solutions are implemented.
How could changing the full retirement age help Social Security?
Raising the full retirement age would extend the time before individuals can claim full benefits, which could reduce strain on Social Security funds and preserve benefits.
Why are many Americans urging Congress to address Social Security now?
With Social Security’s potential funding issues looming, a large portion of Americans want Congress to take action now to avoid drastic benefit reductions in the future.
How would reducing the COLA affect retirees?
Lowering the cost-of-living adjustment (COLA) would lead to smaller annual increases in benefits, reducing overall retirement income over time.
What effect would removing the earnings cap have on Social Security?
Eliminating the earnings cap could substantially increase Social Security’s funding by taxing high-income earners more, covering a significant portion of the shortfall without cutting benefits.