Social Security has faced challenges for years, and as the trust funds near depletion, the situation is growing increasingly urgent. Each year, the Social Security Administration (SSA) Board of Trustees releases a report on the program’s status and future projections. Unsurprisingly, the trust funds remain under strain, and potential benefit cuts loom if Congress doesn’t act soon. But when could these cuts happen? And should you take benefits earlier to safeguard your retirement? Here’s what you need to know:
Why is Social Security struggling?
Understanding the root of Social Security’s cash-flow issues is crucial. The program gets most of its money from payroll taxes, which are used to pay people who are currently receiving benefits. But right now, the money coming in is less than the money going out, so there’s not enough to cover all the costs.
Fortunately, the SSA has two trust funds to draw from: the Old-Age and Survivors Insurance (OASI) fund and the Disability Insurance (DI) fund. These funds have been used to avoid benefit cuts so far, but they will only last for a while. According to the latest SSA estimates, both funds will be depleted by 2035. If no changes are made, the program will only be able to pay out 83% of benefits from its income sources.
This means beneficiaries could face a 17% cut in benefits within the next 11 years.
Should you take benefits early?
If you’re nearing retirement, this news can be alarming. Social Security is crucial for many retirees, and potential cuts could disrupt your financial plans. However, even if the trust funds run out, benefits won’t disappear entirely. The program will still have enough income to cover 83% of payments. As long as payroll taxes are collected, some funds will be available for benefits.
Therefore, taking benefits early may not be advantageous. Early filing before full retirement age results in permanently reduced benefits. If you claim at age 62, your payments are reduced by up to 30% for life. Adding a potential 17% cut on top of that would make monthly checks even smaller. Conversely, delaying benefits until age 70 increases your payments by at least 24% per month. This increase is permanent, providing a buffer against potential cuts.
Choosing the right claiming age
Deciding when to claim benefits depends on several factors, including your reliance on Social Security in retirement. If you have substantial savings, claiming early might be feasible, even with potential cuts. If Social Security isn’t your main income source, early filing could jump-start your retirement.
However, delaying benefits might be wiser if you depend heavily on Social Security. Waiting until age 70 boosts your benefits by 24% or more, translating to hundreds of extra dollars each month. This can help mitigate the impact of any cuts.
While Social Security faces challenges, it’s not going away. By planning carefully and choosing the right claiming age, you can be better prepared for whatever happens with your benefits.
