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  • 3 changes to Social Security benefits we could see in the future

    3 changes to Social Security benefits we could see in the future

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    Social Security has been a vital safety net for retirees, disabled individuals, and surviving family members for decades. However, the program is facing financial challenges that may necessitate changes in the coming years. Let’s explore three potential ways Social Security benefits could change in the future.

    Adjustments to the full retirement age

    One possible change could involve adjusting the full retirement age (FRA), which is the age at which individuals can receive full Social Security benefits. Currently set at 67 for those born in 1960 or later, some experts argue that increasing the full retirement age could help address the program’s funding shortfall. However, this change could mean longer working lives for future retirees and careful consideration of how it impacts individuals with physically demanding jobs or limited job opportunities later in life.

    Read: Does it matter if Social Security checks are delayed?

    This change would also result in a smaller benefit for the earliest filers at age 62, since the reductions are based on the amount of time between your filing age and the Full Retirement Age. If the FRA is increased to 68, for example, filing at age 62 would result in a benefit that is only 65% of your Full Retirement Age benefit amount.

    In addition, unless the maximum filing age is adjusted, Delayed Retirement Credits (DRCs) would also be limited under such a scenario. Currently when your FRA is 67 you have the opportunity to increase your benefit by 24% (8% per year for DRCs), but if the FRA is 68, the increase would only be 16% at maximum.

    Means-testing benefits

    Another potential change is means-testing Social Security benefits. Means-testing would involve adjusting benefit amounts based on an individual’s income or assets. Supporters argue that this would ensure benefits are targeted to those who need them most, potentially reducing the strain on the program’s finances. However, critics express concerns about the potential impact on middle-income earners who have paid into the system throughout their working lives and rely on Social Security as a significant part of their retirement income.

    Read: What happens to Social Security payments if no debt-ceiling deal is reached?

    An interesting concept I’ve recently seen bandied about involves a trade-off between Social Security benefits and Required Minimum Distributions (RMDs) from retirement plans. Essentially an individual could forgo Social Security benefits (at least partially if not fully) in exchange for looser restrictions on RMDs – allowing for further deferral of taxation on retirement accounts.

    Benefit reductions

    In order to sustain the Social Security program, benefit reductions might be considered. This could involve various approaches such as adjusting the formula used to calculate benefits or implementing a scaling factor to reduce benefit amounts. While benefit reductions would aim to preserve the long-term viability of Social Security, they could pose challenges for retirees who rely heavily on those benefits to cover essential living expenses.

    Also see: This is what’s most likely to knock your retirement off course

    Most benefit reduction proposals in the pipeline are in concert with expanding the tax base, while at the same time limiting benefits to the upper echelons of earnings levels. In these cases the taxable wage base is either expanded or removed altogether, and the amounts above the current wage base are credited for benefits at a minuscule rate.

    It’s important to note that any changes to Social Security benefits would likely be accompanied by broader discussions and careful consideration from policy makers. The goal would be to strike a balance between ensuring the program’s financial stability and protecting the well-being of current and future retirees.

    As an individual planning for retirement, it’s crucial to stay informed about potential changes to Social Security benefits. Keeping track of legislative proposals and staying engaged in the conversation can help you adapt your retirement plans accordingly. Consider consulting with a financial adviser who specializes in retirement planning to assess the potential impact on your retirement income and explore other strategies to supplement your savings.

    Read: This lawmaker’s ‘big idea’ could fix most—but not all—of the Social Security crisis

    Social Security benefits may undergo changes in the future as policy makers grapple with the program’s financial challenges. Adjustments to the full retirement age, means-testing benefits, and benefit reductions are among the potential changes that could be considered. By staying informed and seeking professional guidance, you can navigate these potential changes and make informed decisions to secure your financial well-being during retirement.

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  • The government may stop issuing Social Security payments after the debt limit is hit — here’s why

    The government may stop issuing Social Security payments after the debt limit is hit — here’s why

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    There’s a very real possibility the government will stop issuing Social Security payments after the debt limit is hit.

    Scary as that prospect is, however, the alternative might be even worse: A little-known provision of a 1996 law could be interpreted to allow the Social Security trust fund to be used not only to pay Social Security’s monthly checks but also to circumvent the debt limit and pay all the government’s otherwise overdue bills.

    If that happens, any short-term relief to Social Security recipients would come with a potentially huge long-term price tag: The Social Security trust fund could be exhausted much sooner than currently projected—in just a couple of years, in fact.

    Read: I’ll be 60, have $95,000 in cash and no debts — I think I can retire, but financial seminars ‘say otherwise’

    These dire possibilities emerge from an analysis conducted by Steve Robinson, the chief economist for The Concord Coalition, a group that describes itself as “a nonpartisan organization dedicated to educating the public and finding common sense solutions to our nation’s fiscal policy challenges.”

    An issue brief he wrote, entitled “Social Security’s Debt Limit Escape Clause,” is available on the group’s website.

    Let me hasten to add that Robinson is not advocating that the Social Security trust fund be used in this way. In an interview, he instead stressed that he wrote his issue brief because we need to be aware not only that this “escape clause” exists but that its use could have unintended consequences. Though hardly anyone outside Washington knows that it even exists, and relatively few on Capitol Hill, the Treasury Department and the Social Security Administration are very much aware of it.

    Read: ChatGPT is about to make the business of retirement planning and financial advice profoundly human

    Before reviewing the details of this escape clause, it’s worth focusing on the political dynamics that surround it. Because the escape clause lessens the pressure on Congress and the president to come up with a solution to the debt crisis, neither side has an incentive to publicize its existence. But if the government is otherwise pushed to the edge of the fiscal cliff, and it’s facing the potentially huge consequences of an outright default (including the nonpayment of monthly Social Security checks), the political pressure to use the escape clause could be intense.

    The 1996 law that creates the escape clause was passed in the wake of the government hitting its debt limit in 1995 and 1996. Ironically, the intent of that law was to prevent the Social Security trust fund from being used for anything other than paying Social Security benefits. But, Robinson explains, that’s unworkable in the real world. That’s because Social Security checks are sent out by the Treasury’s general account, and if that account is in default the checks would bounce.

    Read: These 3 things will bring you happiness in retirement — and life

    If and when the debt limit is hit, therefore, the only way—in practice—for Social Security checks to continue being issued and cleared through the banking system would be for the Social Security trust fund to “lend” the Treasury sufficient funds that it could pay all the government’s unmet obligations. (I put “lend” in quotes because that’s not exactly how it works; the key is that the “loan” can be structured in ways that don’t count against the debt limit. If you’re interested in reading more about the complex logistics involved, you should read Robinson’s issue brief.)

    Therefore, if the debt limit is hit, which it is projected to do perhaps as early as June, Congress and the president will be on the horns of a huge dilemma:

    • Do they allow Social Security checks to continue getting paid, risking the political fallout of being accused of “raiding” the Social Security trust fund?

    • Or do they stop issuing Social Security payments, risking the political fallout of not issuing Social Security payments, on whom the very livelihoods of many elderly currently depend?

    You can appreciate why Congress and the president don’t want us to know that this escape clause exists. Once we are aware of it, they are put in a no-win situation.

    So fasten your seat belts for a wild ride in coming months as both parties play political brinkmanship over the debt limit and, by extension, Social Security. With both sides by the day hardening their stances, there’s a very real possibility that the debt limit will be hit.

    If that happens, we’ll be hearing a lot more about the little-known provision of a nearly 30-year-old law.

    Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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