The Shrinking Social Security Benefit: What You Need to Know

Adapted from Kiplinger’s Retirement Report by Catherine Siskos

The pandemic that shuttered businesses and left 40 million Americans unemployed also means fewer dollars flowing into Social Security’s coffers. What does this economic downturn mean for people already collecting benefits or those who hope to do so in the future?

The good news is that Social Security can still pay 100% of benefits for the next dozen years or so, and about 75% of benefits after that, even if 1 in 5 people are unemployed for the next 24 months, according to the Center for Retirement Research (CRR) at Boston College.

The bad news is that changes already built into the program are starting to take effect, leading to gradually reduced benefits. “Once we get through this pandemic, the attention should be on fixing the program,” says Alicia H. Munnell, CRR’s director.

Fixing Social Security is possible. According to a CRR report, increasing payroll taxes by 1.6% for both employers and employees would fully fund the program for the next 75 years. Currently, Social Security is already using interest from the program’s trust fund to pay benefits and will start dipping into the trust fund assets next year—the first time that has happened since 1982. If no changes are made, the trust fund could be depleted by 2033, which is two years earlier than originally projected due to the pandemic's economic impact.

If the trust fund is depleted, Social Security would rely entirely on annual payroll tax revenue. Initially, retirees would receive about 79 cents for every dollar of benefits they earned, which would drop to 73 cents per dollar by the end of the century. However, no one expects this scenario to become reality. “Politically, it’s untenable,” says Nancy Altman, president of Social Security Works, a nonprofit advocacy group.

Even if Congress resolves Social Security's funding issues, benefits are still getting smaller. In fact, they have been shrinking for some time due to the rising retirement age. In 1983, Congress gradually increased the full retirement age for people born between 1938 and 1960. Because of the way Social Security’s actuarial formula is calculated, the replacement rate—the amount of money a beneficiary receives compared to their pre-retirement earnings—has fallen as the retirement age has risen, with the steepest cuts affecting those born in 1960 or later.

The Social Security benefits table shows this effect clearly. For someone born in 1937, the full retirement age is 65. A monthly benefit of $1,000 drops to $800 if that person retires early at 62, which makes sense because benefits increase the longer you wait to take them. However, someone born just a year later in 1938, who would receive $1,000 at a full retirement age of 65 and two months, gets only $791 per month at age 62. The reduction continues, with those born in 1960 or later receiving just $700 at age 62 out of the $1,000 benefit they would have received at the full retirement age of 67. “Raising the retirement age is cutting benefits,” says Munnell. As long as Congress keeps the full retirement age at 67, the replacement rate will level off in 2022, and benefits should stop shrinking.

Unfortunately, the same cannot be said for the purchasing power of these benefits, which continues to decline. Social Security’s annual cost-of-living adjustments (COLAs) have not kept pace with rising healthcare costs, which have been increasing faster than other goods and services. According to a study by the Senior Citizens League, this has resulted in a 30% loss of buying power for Social Security benefits since 2000. Seniors spend more than twice as much on healthcare as younger adults.

Additionally, benefits are being frozen more frequently. Since COLAs began in 1975, there have only been three years without increases—2010, 2011, and 2016—all of which occurred in the past decade. Due to the pandemic's weak economy and plummeting oil prices, no COLAs are expected for 2020.

If there’s a silver lining, says Kurt Czarnowski of Czarnowski Consulting, a Social Security and retirement planning firm, it’s this: “There’s no provision for taking money away from beneficiaries in years when the cost of living doesn’t increase.”

The content on this blog is for informational purposes only and is not legal, financial, or professional advice. Social Security rules change periodically, so some information may become outdated. For the most accurate advice, consult a certified National Social Security Advisor (NSSA®). Social Security Professionals, LLC, and NSSA® are not responsible for any errors, omissions, or actions taken based on this blog's content. Use of this blog does not create a client relationship, and all information is provided "as is" without guarantees. By using this blog, you agree to hold Social Security Professionals, LLC, and NSSA® harmless from any claims or liabilities arising from its content. For personalized guidance, contact an NSSA® professional.