A Social Security Administration office in San Francisco.
It’s no secret the funds Social Security uses to pay benefits are running low.
New proposals on Capitol Hill aim to fix the program’s solvency.
Just how dramatic those changes will need to be depends on how soon changes are put through.
Likewise, people who are planning for their retirement now may also want to make adjustments based on unforeseen events that could pop up down the line.
That includes any potential cuts to Social Security retirement benefits.
“When you’re looking at all these ‘what ifs,’ the adjustments you make now in order to plan for something later are much smaller,” said Joe Elsasser, founder and president of Covisum, a Social Security claiming software company.
To that end, Covisum has developed a calculator to help both consumers and financial advisors gauge just how impactful any Social Security benefit cuts could be to their bottom line in retirement.
To be sure, benefit cuts are not a given.
One year ago on Thursday, the Social Security Administration released projections indicating its trust funds could become depleted in 2035, at which point 79% of promised benefits would be payable.
An official update is expected to be released soon with the agency’s annual trustees report. Meanwhile, other projections have already speculated that the expiration date could be sooner due to economic after effects of the Covid-19 pandemic.
To fix that shortfall, experts generally expect some changes. Benefit cuts are among the possibilities, as well as potential payroll tax increases, or a combination of both.
In 1983, when President Ronald Reagan ushered in the last major Social Security reform to fix the program’s then ailing finances, that included gradually raising the retirement age to 67 and imposing some taxes on benefits for the first time.
The key for anyone who is looking toward claiming Social Security retirement benefits now is not to base the decision on worries of what changes could be coming.
“The temptation may be to act on fear,” Elsasser said. “It’s rarely the best track for financial planning.”
“Having a realistic understanding of the impact, even in a bad case, is better than going in with your eyes closed,” he said.
Covisum’s new calculator helps advisors evaluate Social Security claiming decisions. For many people, that is the cornerstone of their retirement plan, Elsasser said.
The calculator can stress test clients’ plans against benefit cuts and other negative scenarios such as poor market performance or negative health situations to see if their plan would still be ok.
“If it is, then you don’t have to act on fear,” Elsasser said.
If it is not, then adjustments like reducing lifestyle expenses or working longer may be necessary.
There is also a free version of the calculator available to consumers.
That version requires four data points: year of birth, benefit amount at full retirement age, percentage of a hypothetical benefit cut and the year that cut occurs.
Then it compares results of a person’s lifespan in five-year increments based on how early they claim — from age 62 or as late as 70 — and how that would be impacted if benefit reductions are put in place or not.
Ultimately, the results can be a starting point for people to evaluate what the potential results could be, which will hopefully lead them to avoid claiming early — and therefore take reduced benefits for life — just because they are afraid of benefit cuts, Elsasser said.
Research indicates those cuts would likely be less than 25%, if they happen at all, he said.
Notably, the calculator does not factor in the idea that benefits could go to zero. Because current tax revenues still support the program, that’s a highly unlikely scenario, Elsasser said. Even younger generations should continue to see income from the program in the future.
“The likelihood of it going to zero is as close to zero as you can get,” Elsasser said.