AN new report from the Social Security Administration Showing that benefits can be cut faster than expected could set alarm bells ringing, especially among those planning to retire within the next decade.
Social Security surplus reserves are expected to run out by 2033, a year earlier than previously estimated, according to trustees of the Social Security and Medicare trust funds. That means the entitlement program can only pay out 76% of its planned distributions at that point if nothing is done to boost the fund.
“People looking to retire before their 50s or in the next 10 or 15 years can probably expect less than 80% of that benefit,” Kristen Carlisle, chief executive of Betterment for Business, told Yahoo Money.
The economic impact of the pandemic has changed Social Security funding prospects. Employment, income, interest rates and GDP fell significantly last year and will gradually recover over the next two years. The pandemic also increased the death rate, slowed the birth rate and decreased, all of which impacted deficit projections, the report said.
That only aggravates the already paralyzed desk.
“Social Security has paid out more than they are taking in,” Scott Thoma, a retirement strategist at Edward Jones, told Yahoo Money. “At some point there will be no reserves left to pull out.”
Thoma said the government can take the same measures as four decades ago, such as raising the age of eligibility for social security and payroll taxes, but it’s a matter of prioritizing and the country’s other pressing issues.
“There are a lot of things they see that have higher short-term priorities,” he said. “It’s not like it’s not a problem. It’s just a 2033 issue versus a 2021 issue.
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Americans should include the potential cut in their retirement plans. Financial experts encourage a retirement plan stress test for multiple outcomes related to health, employment, and cost of living, and when to file for Social Security, which should be treated as a supplement to savings.
“[Social Security isn’t] will be the only pillow for you after you stop working,” Carlisle said. The program is designed to provide only 30% to 40% of your pre-retirement income and not support full retirement, Carlisle said.
Since the average individual Social Security benefit is about $1,500 per month — or $18,500 per year — the average per year would be $14,060 after the 24% cut in benefit. That’s a loss of nearly $90,000 over the course of a 20-year retirement.
To calculate what your benefit will look like after the estimated reduction, use your Social Security Statement. Take the estimated monthly benefits based on the different filing ages and then reduce it by a quarter, Thoma suggested. That figure is what you can expect per month.
If that’s not enough, in addition to your own savings, savers over 50 can contribute more than the annual maximum to their retirement accounts, called catch-up contributions. Younger savers should regularly contribute as much as possible to employer-sponsored plans or IRAs or Roth IRAs that can be set up independently.
“You want to make sure you’re taking advantage of retirement programming as it exists before you turn 50,” she said.