Social Security is facing a funding crisis that could lead to a 23% cut in benefits by 2033 if Congress doesn’t take action. The program’s trust fund is expected to be depleted by then, meaning benefits would have to be paid solely from incoming payroll taxes. This would not be enough to cover full payouts.
The cuts would be devastating for many older Americans who rely heavily on Social Security. According to the Social Security Administration, 12% of men and 15% of women over 65 depend on these benefits for more than 90% of their income. Congress has several options to address the shortfall, but many are unpopular.
They include raising the Social Security tax rate from 12.4% to 17.3% or extending the retirement age. However, there’s no guarantee any of these measures will be enacted in time to prevent cuts, if at all. While changes to Social Security are beyond an individual’s control, there are strategies Americans can use to maximize future benefits.
The Social Security Administration calculates benefits based on lifetime earnings and retirement age.
Social Security benefit reduction concerns
Working and earning as much as possible for at least 35 years is critical to maximizing benefits.
The Social Security Administration looks at the 35 highest-earning years of a worker’s career. If a person has fewer than 35 years of earnings, the years with no earnings are counted as zero, reducing the total benefit. Retirement age also significantly affects benefit amounts.
Benefits can be claimed as early as 62, resulting in a reduction of up to 30%. Delaying benefits until age 70 increases the payout by 8% per year beyond the full retirement age, resulting in a 24% higher benefit at age 70 than at age 67. While not everyone can afford to delay retirement, those who can should consider doing so to maximize their benefits.
For those who feel unprepared for potential Social Security cuts, taking proactive steps can help mitigate the impact. These include maximizing contributions to retirement plans, managing expenses by relocating or downsizing, and supplementing income with a second job. Planning for these options in advance is preferable to being forced into them out of financial necessity.
