Social Security has been struggling for years, but as we get closer to the date when the trust funds will dry up, the situation becomes even more dire.
Each year, the Social Security Administration Board of Trustees releases a report describing the state of the program and predictions for the future. As expected, the program’s trust funds are still struggling, and benefit cuts could be on the horizon if Congress can’t find a solution quickly.
But how quickly can those cuts happen? And should you start taking benefits earlier than expected to protect your pension? Here’s what you need to know.
What happens to social security?
First, it’s important to understand why Social Security has cash flow problems in the first place.
The program relies primarily on payroll taxes to fund benefits, and that money is then passed on to current beneficiaries. Currently, however, Social Security’s revenue sources are lagging behind expenditures, meaning more money is flowing out of the program than is coming in.
Fortunately, the Social Security Administration (SSA) has two trust funds to lean on when it doesn’t have enough money from taxes and other revenue sources. These trust funds are the Old Age and Survivors Insurance Fund (OASI) and the Disability Insurance Fund (DI).
The SSA has withdrawn money from the trust funds to avoid benefit cuts for the time being, but eventually those funds will run out. According to the SSA Board’s latest estimates, both funds are likely to be exhausted by 2035. If nothing changes by then, the program will only be able to pay out what it receives in revenue — and those revenue sources are expected to cover only 83%. of future benefits.
At this rate, beneficiaries could see their benefits drop by 17% within the next eleven years.
Should you take advantage of the benefits early to prepare?
This can be surprising news if you’re about to retire. Social Security is a lifeline for many retirees, and the thought of its benefits possibly disappearing can wreak havoc on your financial future.
But even if the trust funds eventually run out, the benefits don’t disappear completely. Again, the program will still have enough money to cover 83% of future payments, according to the most recent estimates. As long as workers continue to pay taxes, there will always be at least some money to pay out in benefits.
Because Social Security isn’t going away, taking benefits early isn’t necessarily a benefit. In fact, you may be better off delaying benefits to offset potential cuts.
If you file before your full retirement age, your benefits will be permanently reduced. If you file as early as possible at age 62, your payments will be reduced by up to 30% for the rest of your life. If benefits are then cut by another 17%, it will become even harder to rely on your monthly checks.
On the other hand, if you defer until age 70, you will receive your full benefit plus a bonus of at least 24% per month. This bonus is also permanent, so if benefit cuts become a reality, these bigger checks could help soften the blow.
Choosing the right claim age
The right age to start claiming depends on several factors, but it can be useful to think about the extent to which you will be dependent on your benefits in retirement.
If you have enough savings, there’s no harm in applying early, even if the program faces benefit cuts in the future. Potential benefit cuts could reduce your payments, but if Social Security won’t be a major source of income, filing early can give you a head start on retirement.
Delaying claiming can be a smart move if you rely heavily on your benefits. Again, if you wait until age 70, you can earn a bonus of 24% or more, which can amount to hundreds of dollars per month. If cuts to your pension could put your pension at risk, delaying claiming can help protect your finances.
Social Security may be struggling, but it’s not going away. By planning accordingly and filing a claim at the right age for your situation, you can ensure that you are as prepared as possible, whatever happens to your benefits.
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There may be cuts to social security. Should you take advantage of the benefits early? was originally published by The Motley Fool
