Facing Uncertainty: How to Prepare for Possible Social Security Shifts
6 minute read time.
Are you worried about the future of Social Security? If so, you’re far from alone. New research from the Alliance for Lifetime Income shows that Americans routinely claim Social Security early, partly because they doubt the program’s solvency, or fear future cuts.
Given recent headlines, their worries aren’t necessarily unwarranted. According to the 2024 Social Security Trustees’ Report, the program’s primary trust fund will be depleted in 2033. Barring any reforms enacted by lawmakers, that translates to a 21% cut in benefits for recipients.
So, what does it mean for you and your retirement plans?
HOW DID WE GET HERE?
With current payroll tax revenues funding future benefits, certain factors – including the huge numbers of Peak 65’ers reaching retirement age – have put a strain on the system. “There is not enough [current] payroll tax revenue to pay out the full amount of benefits that have been promised,” explains Emerson Sprick, Economist & Associate Director, Economic Policy Program at the Bipartisan Policy Center. That’s why the exhaustion of the trust fund is so eyebrow-raising.
WATCH Your Money Map: How to Prepare for Possible Social Security Shifts
Research from the Alliance for Lifetime Income shows nearly half of Peak 65 consumers are already receiving Social Security payments, with many claiming early because they fear the program won’t be around for the long haul. On this episode of “You Money Map,” Emerson Sprick, an economist and Associate Director of the Economic Policy Program at the Bipartisan Policy Center will address some of the biggest concerns surrounding Social Security and weigh in on what actions lawmakers need to take to protect its future.
But the devil is also in the details. According to Sprick, while the Social Security Trustees’ Report points to a 21% cut for recipients, it’s unlikely that all recipients would see their benefits slashed by that amount at once. “Instead, what would happen is the Social Security Administration would get a tranche of payroll tax revenue, and it would pay out as much in full benefit amounts as it could until it ran out,” explains Sprick. “Over the course of a year, everyone would receive about 20% less in benefits, but you’d have some months where people got paid fully and other people got no benefit.”
WHAT NEEDS TO HAPPEN…AND WHY IT ISN’T
To right the proverbial Social Security ship, lawmakers need to act. They could raise taxes, raise the retirement age, or implement a number of other provisions that would reduce the shortfall. So why aren’t they? According to Sprick, it boils down to politics. “The primary reason, in my mind, is that even the most courageous members of Congress on this issue who are willing to engage with the so-called “third rail” of American politics are receiving absolutely zero support from party leadership,” Sprick says, nodding to the fact that some of the options for solving issues with Social Security aren’t popular with voters, namely, raising taxes.
Unfortunately, as lawmakers kick the can down the road, it becomes harder, and more expensive, to address the issue. “I think there is an increasing recognition that something has to happen, and of course, will happen,” says Sprick. “I do fear that it’s going to be at the 11th hour. That would be the worst-case scenario. It is also, realistically, probably the most likely scenario.”
HOW TO HANDLE THE UNCERTAINTY
With these undeniable risks in the system, it can be hard to wait to claim. As research from the Alliance has shown, claiming early because you fear you’ll miss out by claiming later, is common. According to Sprick, that’s the wrong move, especially if you’re close enough to retirement that you’re thinking about when to claim benefits.
“There’s just very little chance that Congress allows current beneficiaries or folks who are in their 50s to be affected when they have spent the entirety of their career, near the entirety of their career, preparing for retirement with a certain level of Social Security benefits,” says Sprick. “I would be shocked if that happens.”
CLAIMING LATER, AND BRIDGING THE GAP
For those who do decide to delay, there are strategies you can put into play that will help you bridge the gap. According to Sprick, the single most powerful one is to not stop working completely. “I know that’s not realistic for everyone, but I think from a financial perspective, it allows you to not only delay claiming but also delay drawing down your assets, and, in fact, even add to those assets, if you’re still working full-time, even working part-time, so that you’re neither adding nor subtracting from your accumulated assets,” he says.
As Emerson notes, one of the most important aspects of Social Security is its insurance value and the fact that it protects against the loss of income in old age, similar to what can be accomplished with an annuity. “By delaying claiming and potentially using a bridge strategy, whether that be a structured drawdown of your 401(k) or an annuity…to bridge the gap, you’re increasing the foundational level of income in terms of your Social Security benefit that you can rely on for the rest of your life,” says Sprick.