Worried there won't be much left of Social Security by the time you retire? Lots of folks are. These days, because of soaring government budget deficits and concern about the possibility of another global recession, the chances of Uncle Sam eventually slashing Social Security benefits seem greater than ever. (For more on how much you can expect to receive, read How Much Social Security Will You Get?)
TUTORIAL: Retirement Planning
In fact, it's happening right now, though in more subtle ways than the outright benefit cuts many economists say will be necessary to ensure the long-term solvency of Social Security. Indeed, under current law, the size of your Social Security is sure to shrink even if the government never does officially cut benefits. Here are four ways your Social Security is already being reduced.
A Higher Full Retirement Age
The full retirement age (FRA), the youngest age at which you can begin collecting your entire Social Security benefit, has been gradually rising and is now 66 or 67 instead of 65, depending on when you were born. For example, the FRA for people born after 1960 is 67 (full details on this are available from the Social Security FRA table). Although the extension of the FRA doesn't get a lot of press and hasn't sparked much outrage, it is essentially a benefit cut because full benefits kick in later. You'll still be able to receive a reduced benefit starting at age 62, though, just like always. Taking Social Security at 62 typically results in a 20 or 30% benefit reduction, depending on when you were born.
Higher Medicare Premiums
You know what Medicare is - our government-run health care system for people age 65 and over. Like all health care plans, it's getting costlier and taking a progressively bigger bite out of Social Security. The latest example: next year, Social Security recipients are scheduled to receive their first cost of living adjustment increase (3.6%) since 2009. However, the cost of Medicare, which is automatically deducted from the monthly Social Security checks, is going up, too, for about three-quarters of beneficiaries. The higher Medicare premium is expected to eat up about 25% of the additional Social Security which is about $39 a month, on average, that these beneficiaries receive. (To learn more about Medicare, read What Does Medicare Cover?)
Most people probably don't think of Social Security as taxable income, but it can be taxed at the federal level above certain thresholds - "total income" of $25,000 for individuals and $32,000 for married couples. Total income is taxable pensions, wages, interest, dividends and other taxable income plus any tax-exempt interest and half your Social Security benefits. The higher this total is above the applicable threshold, the more of your Social Security benefits that's subject to federal income tax, and the amount can range from 50 to 85%. Social Security may also be subject to state and local income taxes.
Shrinking Wages and Unemployment
The size of your Social Security benefit is based on how much money you make during your working years. And Americans have been earning less, or even nothing in some cases. "The median paycheck - half made more, half less - fell again in 2010, down 1.2% to $26,364," journalist David Cay Johnson recently wrote in an article published by Reuters. "That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999." The number of people with any work has fallen by 5.2 million since 2007, the first year of the Great Recession, added Johnson. "This means 3.3% of people who had a job in 2007, or one in every 30, went all of 2010 without earning a dollar," he reported.
The Bottom Line
Because of factors like those discussed here, Social Security benefits may gradually erode over the years, and become a progressively smaller source of retirement income. To minimize the effect of this on your retirement, look for ways to save more while you're working and keep in mind you may need to work longer or work part-time in retirement. (For more on Social Security, see Missing Out On Social Security.)