January 21, 2022

Social Security Benefits Can Be Withdrawn Early – What Does This Mean for You?

kupicoo / Getty Images

kupicoo / Getty Images

The news that Social Security benefits could be cut earlier than expected has set alarm bells ringing for Americans whose… retirement plans have already been disrupted by COVID-19. But financial experts say it’s not time to panic yet.

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A report by Social Security and Medicare trustees said benefits will have to be cut by 2034 — a year earlier than previously projected — if Congress doesn’t address the program’s long-term funding gap. If Congress doesn’t act, the combined Social Security trust funds can pay only 78% in promised benefits to retirees and disabled beneficiaries. Some news reports bring the percentage closer to 75%.

It’s no mystery why the funds are disappearing faster than expected. Look no further than last year’s economic downturn caused by the pandemic, which contributed to a major drop in employment resulting in declining payroll tax revenues.

But just because benefits may need to be cut early doesn’t mean Social Security funds are running out, as some fear. That probably won’t happen, according to Monotelo Advisors, a Chicago-based financial and tax planning firm.

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On its website, Monotelo said that if the only Social Security funds available by the middle of the next decade are the current payroll taxes being paid, the Social Security administration could still pay about three-quarters of the benefits promised.

“While a 25% reduction in benefits could significantly harm the retirement plans of those dependent on their Social Security benefits, it is much less harmful than the program being shut down completely,” Monotelo said.

Scott Thoma, retirement strategist at Edward Jones, offered a similar view in an email to GOBankingRates, saying that just because Social Security reserves could be depleted a year earlier than expected doesn’t necessarily mean Social Security is going out of business.

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“There are changes that can be made to give the program a solid foundation,” Thoma said. “For the program to remain fully funded over the 75-year projection horizon (they run it 75 years – to 2095), payroll taxes would need to increase by about 3.36%, or just under 1.7% for both the employer as well as the employee, to fully fund the program. If nothing changes, benefits should be cut by 24% from 2034 (they could pay 76 cents for every dollar of benefits).”

And that is only if the government does nothing to restore social security. Other changes that could be made include raising the full retirement age, revising discount formulas and abolishing the cap on taxable income.

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“The most important thing to remember is that Social Security doesn’t necessarily go bankrupt,” Thoma said.

The potential for reduced benefits may tempt some retirees to apply for benefits early in order to get as much as possible before they run out of money. But that’s not necessarily the best strategy.

“If you start taking your benefit as soon as possible, it will be reduced to 70% of your full retirement age,” noted Monotelo. “If you compare this to the 75% that could be received even after the fund runs out, you would still hurt your pension by applying early.”

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This article originally appeared on GOBankingRates.com: Social Security Benefits Can Be Withdrawn Early – What Does This Mean for You?

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