Social Security Change Can Come at a Detriment for Many

This Possible Social Security Change

For millions of Americans already struggling to plan for their retirement, the possibility of changes in social security policy could make it even more difficult. Lawmakers and policymakers are considering changes to the social security policy, and one of the changes being considered is an adjustment in the full retirement age, which could have a big impact on how people plan their finances in the future.

The adjustment, although intended to help stabilize social security, could mean that people will be losing some of their benefits over their lifetime and will be required to save even more money on their own, something that could prove to be difficult given how tight people’s budgets are. “With Social Security just a few years away from insolvency, it’s more important than ever to build up your own retirement savings so you’re prepared to cover what your benefits don’t,” according to Yahoo! Finance.

Why Social Security Changes Are Being Considered

The United States’ Social Security system offers retirement benefits to more than 65 million citizens. The system has traditionally functioned as a safety net for those in retirement without access to other forms of personal savings.

However, changes in demographics are causing strain on the system. Americans are living longer than previous generations. Birth rates are also decreasing. This means there are fewer people paying into the system in terms of payroll taxes than there are people receiving benefits from it.

The United States government has projected that its trust fund for Social Security will run low in funding in the next decade if changes are not made to the system. This means that it will either have to decrease benefits or seek other funding mechanisms in order to continue to pay those benefits.

There are a number of changes that are being discussed to alleviate these issues.

What Raising the Retirement Age Means

One of the most talked-about ideas is gradually raising the age of Americans eligible for full Social Security benefits. “If no action is taken, benefits will be cut by 24% across the board, devastating nearly 70 million retirees and causing broad economic strain,” according to Seeking Alpha.

The full retirement age for most Americans is between 66 and 67 years old, depending on the year they were born. Some lawmakers have even talked about gradually raising the age of eligibility for Social Security benefits to 68, 69, or even 70 years old in the coming decades.

The plan may not seem so bad at first glance. However, the reality is that raising the retirement age could have substantial financial implications.

For those Americans who retire before the full retirement age, the Social Security benefits they receive will be permanently reduced. This means that those Americans who retire before the new age threshold will receive smaller checks for the rest of their lives.

For most Americans, especially those in physically demanding fields or with health concerns, retiring later may not be an option.

A Hidden Benefit Cut

This has been termed a “stealth” benefit cut by economists. Although the actual calculation for determining the benefits does not change, it does impact the benefits by extending the age for retirement.

For instance, if an individual has been planning to retire at 67, the new rules could extend this age to 69. In this case, if the individual chooses to retire at 67, the benefits will be reduced, which could impact their monthly income.

This could result in a loss of tens of thousands of dollars over the period of retirement.

This could impact those who are dependent on the benefits, especially those in lower-income groups.

The Challenge for Retirement Savers

It would also place more pressure on individuals to save more money on their own.

However, many Americans are already having a hard time doing so. This is because, according to surveys, a significant portion of the labor force has limited or no retirement savings at all.

The rising housing costs, student loan debts, and living expenses have made it hard for young people to save more for their retirement. In addition, traditional pensions have become less common in the private sector, and more responsibility rests on individuals to plan for their retirement.

However, if the benefits of Social Security become less generous because of a higher retirement age, individuals may have to rely more on their own savings accounts, such as 401(k)s and IRAs.

Who Could Be Most Affected

Although the policy may impact the lives of all working individuals, it is likely that the impact will not be distributed evenly among the population.

While professionals with higher incomes may be able to work longer or use their investments and savings as additional sources of income, those with physically demanding jobs, such as construction, manufacturing, or healthcare support, may not be able to work longer into their late 60s or beyond.

Additionally, while lower-income individuals may rely more on Social Security as their primary source of retirement income, they may be the same individuals who will be affected the most if their benefits are reduced.

Some opponents of the plan claim that the proposed increase in retirement age will widen the gap between the rich and the poor.

Alternative Solutions

Because of these issues, a number of policymakers and economists have suggested other alternatives to improve Social Security’s finances.

One of the most popular alternatives to improve Social Security’s finances is to raise the cap on payroll taxes. Currently, people are not required to pay Social Security taxes on income above a certain level. By removing this cap, it would increase funding for Social Security.

There are other alternatives to improve Social Security’s finances, such as a slight increase in taxes or changes in benefits for high-income retirees.

These alternatives to improve Social Security’s finances would allow it to become financially sound without burdening future retirees.

Planning for an Uncertain Future

Regardless of how any of those changes are implemented, experts in finances say that people should be prepared for a reality in which Social Security plays a less important role in their retirement finances than it does now.

That means saving through employer-sponsored retirement plans, diversifying investments, and planning for a flexible retirement strategy.

As debate continues in Washington about how to reform Social Security, there is no doubt about this: The program is in trouble financially for the future.

For those in the future, those policy decisions could dictate not only when they retire—but how secure they will be in that retirement.

By David Loran Jr

A successful Editor-in-Chief, journalist for over 6 years, writing about important topics that are going on within the U.S. and beyond.

Sources:

Yahoo! Finance: This Possible Social Security Change Could Make Saving for Retirement Even Harder

Seeking Alpha: The Social Security Trust Fund Is Rapidly Approaching Insolvency

Featured Image Courtesy of Alpha Photo’s Flickr Page – Creative Commons License

Inset Image Courtesy of Daniel Foster’s Flickr Page – Creative Commons License