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These Social Security benefit changes are on the table

The Motley Fool logo The Motley Fool 6/22/2020 Christy Bieber
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Warnings abound about impending Social Security benefit cuts if the program's finances aren't fixed in the coming years. While an automatic benefit cut could become necessary in 2035 when the program's trust fund runs dry, action on the part of lawmakers to fix this issue doesn't necessarily mean that retirees will get everything they've been promised.

In fact, it's very likely that any solution to fix Social Security could involve a cut to benefits in its own right, even if lawmakers don't necessarily come right out and say they're reducing the income retirees receive. In fact, three common proposals to shore up Social Security would involve a reduction in income for at least some retirees. Here are those proposals and how they could affect you. 

1. Raising the retirement age

Raising the retirement age is popular among Republicans, many of whom point out that life expectancies have risen significantly since Social Security was created. Democratic nominee Joe Biden has also expressed support for raising the retirement age, proposing the idea in 2007 as part of a bipartisan fix for the program. 

Pushing back the age when you can claim a full benefit may not seem like a cut, but it is. If you have to work a year longer to get your standard benefit, you're missing out on a full year of income. And if you retire on the same schedule you had planned, you would be hit with early filing penalties. Plus, if full retirement age is moved to later, you miss the chance to earn delayed retirement credits that raise your benefit for each month you wait to claim after full retirement age, up to 70.

2. Switching to the chained CPI

This method of cutting benefits is a little more complicated, but it basically involves changing the way Social Security calculates inflation when determining annual cost-of-living adjustments (COLAs). 

Under the current system, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used to measure rising prices and determine whether seniors' benefits need a boost to keep pace with inflation. But in 2014, President Barack Obama suggested a switch to a different price index, the Chained Consumer Price Index. This pricing index accounts for the fact that consumers adjust their purchasing behavior when prices rise; for example, switching to chicken when pork prices go higher, or vice versa. 

A switch to the chained CPI would mean benefits would rise more slowly and beneficiaries would lose more buying power over time. And with some experts concerned that COLAs are already too low to reflect the rise in prices for things seniors most often spend on, this could be a big problem. 

Related video: How Social Security benefits are calculated on the median US salary (provided by CNBC)

3. Means-testing benefits

A final proposal that has been supported by some Democrats is to means-test benefits. This would mean that higher-income retirees would see a reduction in their benefits or even get none at all if their income exceeded a certain limit. 

Social Security is already progressive, providing lower-income workers with benefits equaling a larger percentage of their pre-retirement income. But imposing means-testing would be a radical shift in the way Social Security works. It's always been sold as an entitlement since people earn their benefits based on what they pay in. 

Means-testing could also eventually result in an increasing number of retirees being excluded from benefits if the income limits at which benefits were phased out weren't indexed to inflation.

How will lawmakers resolve the shortfall?

It remains to be seen if these solutions make it into a final plan to shore up Social Security, or if politicians take any action at all before the program's finances become more dire.

But current and future retirees need to prepare for a likely benefit cut in the coming decades, either because the program runs out of money or because lawmakers reduce retirees' income to make sure that doesn't happen. 

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