The Social Security Trustees have been warning about it for years now, but a new white paper ranks the dollar impact on future retirees of potential changes to address Social Security’s funding shortfall.
The Social Security Trustees have been warning about it for years now, but a new white paper ranks the dollar impact on future retirees of potential changes to address Social Security’s funding shortfall.
Indeed, unless changes are made to address the current funding shortfall, in about a decade retirees will face a significant reduction in benefits, according to HealthView Services’ “Funding Social Security: Ranking the Cost of Proposed Changes on Americans Planning for Retirement.”
Drawing on the Society of Actuaries’ modeling, the paper examines the financial impact of proposals to address the program’s solvency on both mass affluent and average-income Americans who are either 25 or 10 years from retirement.
Perhaps not surprisingly, it finds that the greatest impact will be if lawmakers do nothing and cut benefits. The paper shows if benefits are reduced by 21% – consistent with current Social Security funding expectations – a mass affluent couple 25 years from retirement risks losing $908,000 in future Social Security benefits. An average income couple that is only 10 years from retirement would face a cut in lifetime benefits of $252,000.
Full Retirement Age
The next most significant proposal in terms of dollar impact for retirees will be the most likely – changing the full retirement age (FRA).
In this scenario, the paper finds that delaying the FRA for future retirees by one year from 67 to 68 would cost a mass affluent couple retiring in 25 years $325,000 in lost lifetime benefits. This is if they claimed Social Security at 65 years old.
Under the same conditions, an average-income couple would see benefits reduced by $249,000. If those same couples (mass affluent and average-income) delay claiming for one year, they will see Social Security reduced by $125,000 or $95,000, respectively. The paper notes that this change is expected to address 15% of Social Security’s solvency shortfall.
“This paper provides working Americans, advisors and the financial community cost projection data to understand the ways in which changes to Social Security will affect retirement plans,” HealthView Services CEO Ron Mastrogiovanni stated. “Congress will have to make hard choices that will reduce benefits or increase tax revenue for the program – both of which have a significant cost to future retirees.”
COLA Adjustments
The third most-significant proposal would be lowering the annual cost-of-living adjustment based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) by 0.5% each year through retirement. This would have a “compounding effect” on benefit growth, as those further from retirement would see a greater impact with more years of lowered COLAs.
For a mass affluent couple retiring in 25 years, this would mean a reduction of almost $287,000 in lifetime benefits. An average-income couple 10 years from retirement would lose just under $100,000 in Social Security payments. The projections show that the smaller payouts would address 28% of Social Security’s funding requirements.
Meanwhile, reducing spousal benefits from 50% to 33% would have a minimal effect on Social Security funding. However, it would significantly reduce the benefits of the lower-earning spouse of a mass affluent couple 25 years from retirement by close to $250,000.
FICA Taxes
The paper also examines the cost of proposals to raise taxes on employees and employers to fund Social Security. Raising employees and employers’ FICA tax from 6.2% to 8% would fully address the Social Security funding shortfall.
The cost to working Americans would range from $133,000 in lower net income for a mass affluent couple over the next 25 years to $22,000 for an average-income couple retiring in 10 years.
A change that will have no impact on mass affluent and average-income couples would be to eliminate the maximum earnings limit on Social Security contributions for high-income Americans. In this case, a couple earning $500,000 a year, 25 years from retirement and receiving no additional benefits, would pay an additional $252,000 into the system. According to Society of Actuaries modeling cited in the report, this would address 70% of Social Security’s shortfall.
“The cost for individuals of addressing Social Security’s funding needs will vary considerably based on which proposals are implemented and when they are put into place, but also by income, longevity and claiming age,” added Mastrogiovanni. “Modest additional contributions to retirement savings will be sufficient for most to future proof retirement plans against a range of scenarios in which benefits may be reduced, but can still be counted on as a key source of retirement income.”
The full text of the white paper can be found here.
Source: NAPA
