Social Security is a vital source of income for many retirees. According to a recent Gallup poll, 60% of retirees say their monthly Social Security benefits are a major source of income. Another 28% said Social Security played at least a minor role in their budget.
However, the Social Security Administration (SSA) has revealed that by 2033, only 79% of benefits will be payable if nothing is done to help the system. This represents a benefit reduction of $1,375 monthly or up to $16,500 over a year for couples receiving benefits. Individuals would see a reduction of $1,033.
The SSA’s program relies heavily on a pyramidal structure. Without enough increase at the “base,” it is a matter of time before the “top” falls. The number of people contributing to Social Security has dwindled as birth rates decline over time.
Some measures can be taken from a governmental standpoint to guarantee the future of Social Security checks. These include increasing the minimum retirement age, the number of credits needed to retire, or the percentage that workers and employers contribute through Social Security taxes.
Future reductions impact retirees’ Social Security
However, these measures may not be well received by the population. Another factor that can reduce Social Security payments is where retirees live. While most states do not tax Social Security benefits, nine states still do: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
The tax rules for these states vary. For example, in Colorado, taxpayers under age 65 with more than $20,000 in taxable benefits on their federal returns owe state income tax, while retirees are excluded. Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, explained, “Most of these situations involve taxation that only kicks in if you earn over a certain income in retirement and can even phase out over time.”
Social Security benefits can also be reduced if beneficiaries are still working and have not reached their full retirement age.
The retirement earnings test states that if you earn more than $22,320 in wages during 2024, the government will reduce your monthly benefit by $1 for every $2 above that limit. Additionally, if you’re collecting spousal benefits and your spouse decides to suspend their benefits, you may see a lower benefits check. One important stipulation of spousal benefits is that the spouse whose earnings record you’re collecting on must also receive Social Security for you to be eligible.
Understanding the rules and planning accordingly can help retirees maximize their Social Security benefits and avoid any unexpected reductions. It’s essential to ensure you keep as much of those monthly checks as possible, as Social Security is a crucial source of income for many seniors.
