A new report from the Social Security Administration showing benefits could be reduced sooner than anticipated could set off alarm bells — especially among those planning to retire within the next decade.
Social Security's surplus reserves are expected to run out in 2033, one year earlier than previously estimated, according to the Trustees of the Social Security and Medicare trust funds. That means the entitlement program will only be able to pay out 76% of scheduled benefits at that time if nothing is done to boost the fund.
“People who are looking to retire in their early 50s or in the next 10 or 15 years can probably expect less than 80% of that benefit,” Kristen Carlisle, general manager of Betterment for Business, told Yahoo Money.
The economic fallout brought on by the pandemic changed Social Security’s funding outlook. Employment, earnings, interest rates, and GDP dropped significantly last year and will recover gradually over the next two years. The pandemic also elevated the mortality rate, slowed the birth rate, and reduced, all of which affected the shortfall projections, the report said.
That’s only exacerbated the already hamstrung agency.
“Social Security has been paying out more than they’ve been taking in,” Scott Thoma, retirement strategist at Edward Jones, told Yahoo Money. “At some point in time, there won't be any reserves left for them to pull from.”
Thoma said the government can enact the same levers it pulled four decades ago like increasing the full age of Social Security eligibility and payroll taxes, but it’s a matter of prioritization and the country’s other pressing problems.
“There's a lot of things that they see that are higher near-term priorities,” he said. “It's not like it's not an issue. It's just a 2033 issue versus a 2021 issue.
Assess your retirement savings
Americans should factor the potential reduction into their retirement plans. Financial experts encourage a retirement plan stress test for multiple outcomes relating to health, employment, and living expenses, and when to file for Social Security benefits, which should be treated as a supplement to savings.
“[Social Security isn’t] going to be the sole cushion for you after you stop working,” Carlisle said. The program was conceived to provide for only 30% to 40% of your pre-retirement income and not fully support retirement, Carlisle said.
Considering the average individual Social Security benefit is around $1,500 monthly — or $18,500 annually — the average per year would equal $14,060 after the 24% benefit reduction. That’s a loss of nearly $90,000 over the course of a 20-year retirement.
To calculate what your benefits will look like after the estimated reduction, use your Social Security statement. Take the estimated monthly benefits based on the different filing ages and then reduce it by a quarter, Thoma suggested. That figure is what you can expect per month.
If that's not enough — in addition to your own savings — savers over 50 can contribute more than the annual maximum to their retirement accounts, known as catch-up contributions. Younger savers should take regularly contribute as much as they can to employer-sponsored plans or IRAs or Roth IRAs that can be set up independently.
“You want to make sure that you're taking advantage of retirement programming as it exists before you turn 50,” she said.