kiplinger-retirement-20200701

Social Security benefits have been for some time because of the rising retirement age.

The pandemic that shuttered businesses and left 40 million Americans unemployed also means fewer dollars flowing into Social Security’s coffers.

What does this bode for people collecting benefits or who hope to do so one day?

The good news is that Social Security can pay 100% of benefits for the next dozen or so years and about 75% of benefits thereafter, even if 1 in 5 people are unemployed for the next 24 months, according to the Center for Retirement Research at Boston College. The bad news is that changes baked into the program are coming home to roost, and the effect is that benefits keep getting stingier.

“Once we get through this pandemic, the attention should be on fixing the program,” CRR’s director Alicia H. Munnell said.

Fixing Social Security isn’t insurmountable. Hiking payroll taxes 3.2 percentage points — 1.6 percentage points each for employers and employees — would fully fund the program for the next 75 years, a CRR report says.

Social Security is already tapping interest from the program’s trust fund to pay benefits and will begin dipping into fund assets next year, the first time that’s happened since 1982.

If Congress doesn’t act, the fund could be depleted by 2033, two years sooner than originally projected because of the pandemic economy.

After that, the program would rely entirely on annual payroll tax revenue. At first, retirees would get 79 cents for every dollar they’d earned in benefits, dropping to 73 cents per dollar by the end of the century. No one, of course, expects that to happen.

“Politically, it’s untenable,” said Nancy Altman, president of Social Security Works, a nonprofit advocacy group.

Even if Congress fixes Social Security’s funding, benefits are still shrinking. In fact, they have been for some time because of the rising retirement age.

With Americans living longer, Congress in 1983 gradually raised the full retirement age for people born between 1938 and 1960.

Because of the way Social Security’s actuarial formula is calculated, the replacement rate — the benefits amount relative to preretirement earnings — fell as the retirement age rose, with the steepest cuts hitting those born in 1960 or later. That rate should have remained the same at 40%; instead it’s about 38%.

Social Security’s benefits table bears this out.

The full retirement age for someone born in 1937 is 65. A monthly benefit of $1,000 drops to $800 if that individual retires early at 62, which makes sense given that benefits accrue the longer you wait to take them. But someone born a year later in 1938, who would have received $1,000 at the full retirement age of 65 and two months, gets just $791 per month at age 62.

The benefit amount continues to drop with those born in 1960 or later getting just $700 at age 62 of the $1,000 benefit they would have received at the full retirement age of 67.

“Raising the retirement age is cutting benefits,” Munnell said.

As long as Congress keeps the full retirement age at 67, the replacement rate will level off in 2022 and benefits should stop shrinking, she said.

Send questions to moneypower@kiplinger.com. Visit Kiplinger.com for more on this and similar money topics.

Load comments

You must be a full digital subscriber to read this article. You must be a digital subscriber to view this article.

Your sports-only digital subscription does not include access to this section.

SALE!
Only $3 for 3 Months
Unlimited Digital Access

  • Unlimited access to every article, video and piece of online content
  • Exclusive, locally-focused reporting
  • News delivered straight to your inbox via e-newsletters
  • Includes digital delivery of daily e-edition via email
SALE!
Only $3 for 3 Months
Unlimited Digital Access

  • Unlimited access to every article, video and piece of online content
  • Exclusive, locally-focused reporting
  • News delivered straight to your inbox via e-newsletters
  • Includes digital delivery of daily e-edition via email