In 2034, the incoming income will be enough to pay about 76% of planned Social Security benefits, a Social Security Trustees Report Forecasts 2020.
How could different generations plan this? Do they have to take into account a 24% decrease in their planned benefit? Shouldn’t they include Social Security benefits in their retirement income plan at all? Or maybe they’re doing something else.
“While I think a combination of reforms is much more likely to remove the need for budget cuts of the magnitude suggested by the trustees report, people need to be aware of the impact a budget cut would have on their overall financial situation.” says Joe Elsasser, a certified financial planner and president of Covisum.
What are some of those reforms? Tax increases, benefits or a combination of both are the often mentioned reforms. But to date, there seems to be little to no interest on the part of legislators in the Coming Shortage Between Incoming Revenue and Planned Benefits.
What to do then? “The implications for Social Security solvency tend to fall on generational lines,” explains Marcia Mantell, a director of Mantell Retirement Consulting.
She agrees with Elsasser that Social Security beneficiaries and potential beneficiaries should consider the following actions:
Baby boomers: on track
Social Security estimates for those born from 1946 to 1964 should be on track and are unlikely to be lowered if Congress fails to resolve the issue. reserve account within the general trust fund, or fail to raise payroll taxes to support commitments to these retirees, Mantell says.
Elsasser agrees, but suggests taking some precautions. “Baby boomers should plan for benefits as projected, but stress-test for a cut in benefits,” he says. “Historically, benefits have been phased in over time.”
For example, the last solvency crisis of this magnitude occurred in 1983. “And some of the reforms that were introduced are still being phased in today, such as raising the full retirement age from 65 to 67,” notes Elsasser.
According to Elsasser, stress testing allows you to practice what you would change in your plan if the full reduction became a reality. “If the cuts on your plan are too painful to bear when they come up, make smaller changes now and keep an eye on the situation,” he says. “Smaller cuts to your lifestyle will hurt less sooner than bigger ones later.”
Covisum has an austerity calculator that allows consumers to identify how benefit cuts would affect their break-even age.
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Gen X: plan a 10% discount
If you were born between 1965 and 1980, planning your retirement income becomes more important than ever, Mantell warns.
Elsasser recommends planning a 10% cut in your Social Security benefits and doing a retirement projection that includes a reduced Social Security amount to balance your lifestyle today with the lifestyle you would like to live after retirement.
The good news about this bad news? “For the 65 million of you who are between 41 and 56 years old, you’re in your prime,” Mantell says. And that means you can and should increase your personal savings.
“You’ll do well to rethink, re-budget and redesign your spending and your savings strategy in case Social Security brings in less revenue than currently projected,” she warns. “You have time on your side, and every $1,000 or $2,000 or $5,000 you can throw away right now will increase your income for retirement and make the tradeoffs you may need to make.”
And what’s the worst-case scenario if you ramp up your savings and cut Social Security benefits? “You end up getting more than you need,” says Elsasser.
Gen Z and millennials: too early to tell or to worry about
Experts say it’s too early for Millennials and Generation Zers to worry about lowering Social Security.
“You’re too young to confidently guess how Social Security will pay the benefits,” notes Mantell. “Half of you don’t even have your 40 credits to qualify. So your focus will be on you.”
Elsasser shares that view: “While it’s important for everyone, especially if you’re under 40, you should continue to focus on improving your skills, education and training to maximize your earning potential during your peak income years,” he advises. “Consistently saving in vehicles you won’t touch until retirement is also important. In any case, be sure to take advantage of corporate competitions or incentives. ”
The best scenario
“I don’t know of a single Social Security expert who believes Congress will allow significant cuts to beneficiaries,” he says. “Politicians are dealing with a nonprofit situation where it is painful to make changes today to strengthen Social Security because it will mean either higher taxes or lower benefits, but the alternative of not changing anything is worse – a big number of voters see a reduction in their retirement income.”
And this, he predicts, will motivate Congress to raise payroll taxes, raise the claim age or change the inflation adjustment.
This article originally appeared on USA TODAY: Social Security Cuts: What Can You Expect Based on Your Age?