Social Security Cuts Planned for the Future? Everything You Need to Know About Proposed Changes (UPDATE)

Last Updated on July 19, 2021

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Social Security cuts — or talk of them — are once again in the air. At this time, planning for retirement must include preparation for the likelihood that there will be cuts in social security benefits over time. 

The 2020 Trustees report on the status of the Medicare and Social Security programs says, “The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2034 [but at that point] the fund’s reserves will become depleted and continuing tax income will be sufficient to pay 76 percent of scheduled benefits.” 

Fact vs. Myth

There is good news, though, about the Disability Insurance Trust Fund, under law a distinct entity. The Trustees’ now expect that the DI will be able to make scheduled benefits until 2065. That is 13 more years for the expectation of 100% benefits than projected by the 2019 report. 

But focusing on the OASI: what should individuals and couples planning retirement and considering options expect to happen as a consequence of the shortfall? Don’t panic. 

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For the most part, those who were born before 1964 have the least reason to be alarmed. Their benefits, experts say, are unlikely to be reduced even if Congress fails to put in place a reform securing the solvency of the reserve account within the overall trust fund, experts say.

A press report quotes Joe Elsasser, president of Covissum, a financial software and consultation company, saying: “Baby boomers should plan for benefits as they are projected, but stress test for a benefit cut.”

Historically, as Elsasser points out, benefit cuts are phased in over time. If they become necessary they will hurt younger folks, now 57 or younger.   

Knowing the History

Due to underlying demographics, the system is always in need of revision. At the end of the 1930s, one could expect that only 54% of adult men in the United States and 61% of the adult women would even live to be 65. By 2015, those numbers were, respectively. 80% and 88%. The pandemic and other factors have lowered those numbers slightly since then, to 79% and 87%

That sounds like a remarkable change. So how did the system survive? It survived because it was repeatedly reworked over that period, often in ways that have been extremely controversial. But the checks haven’t bounced and there remains that reserve. 

Social Security has a system of cost-of-living allowances (COLAs). In other words, its payouts are indexed to inflation, a system set in place in the 1970s. The Trustees’ report, of course, takes this as a given in its calculations. So it is worth noting that if any cut is deemed necessary, for future generations of retirees, it will not take the form of a cut in nominal benefits but of a cut in inflation-adjusted benefits, that is, a change in the COLA. 

As a related point: there is a taxable maximum built into the system. There is a dollar amount of annual earnings above which the social security tax does not apply. That, too, is adjusted to inflation and, in 2020, it was $137,700. One relatively painless way of shoring up the reserve would be the increase of the taxable maximum; that is, a change in the formula for its expected annual increases.

By way of conclusion, we can say that alarm is not reasonable. People earning more than $150,000 a year should consider the likelihood that they will be paying more as the cap rises in the years to come. Also, people born more recently than 1964 should consider than COLA will be less kind to them once they are retired than it has been to their parents.