An office of the Social Security Administration in San Francisco.
It’s no secret that the funds Social Security uses to pay benefits are running out.
New proposals for Capitol Hill are intended to improve the solvency of the program.
How drastic those changes need to be depends on how quickly changes are implemented.
Likewise, people planning their retirement now may also want to make adjustments based on unforeseen events that may arise.
That includes any cuts to Social Security retirement benefits.
“When you look at all these ‘what ifs’, the adjustments you make now to plan something later are much smaller,” said Joe Elsasser, founder and president of Covisum, a software company that claims software for Social Security.
To that end, Covisum has developed a calculator to help consumers and financial advisors estimate how drastic any Social Security cuts could affect their ultimate gains in retirement.
Of course, cutbacks are not self-evident.
A year ago, on Thursday, the Social Security Administration released forecasts that its trust funds could be exhausted by 2035, after which 79% of promised benefits would be payable.
An official update is expected to be released soon with the agency’s annual trustees report. Other projections have already speculated that the expiration date could be earlier due to the economic fallout from the Covid pandemic.
To solve that shortfall, experts generally expect some changes. Discounts on benefits are possible, as are any wage tax increases, or a combination of both.
In 1983, when President Ronald Reagan ushered in the last major Social Security reform to restore the program’s then ailing finances, changes included gradually raising the retirement age to 67 and the first imposition of some taxes on benefits.
The key for anyone looking to claim Social Security retirement benefits is not to base the decision on concerns about what changes might be coming.
“The temptation may be to respond to 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 counselors evaluate decisions about applying for Social Security. For many people, that’s the cornerstone of their retirement plan, Elsasser said.
The calculator can stress-test customers’ plans for benefits and other adverse scenarios, such as poor market performance or adverse health conditions, to see if their plan is still okay.
“If so, you don’t have to respond to fear,” Elsasser said.
If this is not the case, adjustments such as lowering lifestyle costs or working longer may be necessary.
A free version of the calculator is also available for consumers.
That version requires four data points: year of birth, benefit amount at full retirement age, percentage of a hypothetical benefit discount, and the year in which that reduction occurs.
It then compares the results of a person’s lifespan in five-year increments based on how early they claim — from age 62 or up to age 70 — and how that would be affected if benefits were cut or not.
Ultimately, the results could be a starting point for people to evaluate what the possible outcomes might be, which will hopefully lead them not to claim early — and therefore get lifetime discounts — just because they fear benefits, Elsasser said.
Research suggests those cuts will likely be less than 25%, if they happen at all, he said.
In particular, the calculator doesn’t take into account the idea that benefits can go to zero. Because current tax revenues still support the program, that’s a highly unlikely scenario, Elsasser said. Younger generations should also continue to see income from the program in the future.
“The probability of it going to zero is as close to zero as possible,” Elsasser said.