Why 78% is a Number That Should Scare Every Social Security Retiree

Millions of Americans depend on  Social Security to help them cover costs in retirement. Anyone who is currently collecting Social Security, or who plans to in the future, has a number they should know: 78%.

This number should frighten retirees, and potentially prompt them to take action to shore up their financial future. Here’s why that’s the case.

Why Social Security retirees need to be worried

So why do Social Security retirees need to be so worried about the 78% number? It’s simple. That’s the percentage of promised benefits that the Social Security Trustees indicate could be paid out to Social Security recipients starting in 2032.

See, the Social Security Trustees released their latest report about the future of Social Security’s finances.  The report came out in June, and it revealed that:

•  The Old-Age and Survivors Insurance (OASI) trust fund can pay 100% of promised benefits only until 2032, at which time it will be depleted. Social Security will only be able to pay 78% of promised benefits when that happens.
• If the OASI Trust Fund and the Disability Insurance trust funds are combined, which is not allowed under current law but which is widely assumed to be what will happen, then promised benefits can be paid until 2034. At that time,  Social Security recipients would receive only 83% of promised benefits.

Neither of these projections is good, but the warning that benefits will be cut in 2032 is especially dire news because that is only six years away. Current retirees and those leaving work in the coming years will be very much affected by this substantial benefit cut in well under a decade. Not only that, but the longer lawmakers wait to try to fix the problem, the harder it gets as the fund’s reserves become more depleted.

Most seniors cannot afford to collect just 78% of their Social Security income and continue to cover all of their costs.

How likely are the coming benefit cuts?

This is obviously very bad news for retirees, but is it realistically something that they should be worried about? Unfortunately, the answer is yes — but perhaps not for the reasons they might assume.

Lawmakers are very unlikely to allow a 22% cut to benefits, but if they can’t find a compromise soon, then it becomes more expensive and difficult to fix the shortfall. Any eventual solution could result in either a substantial increase in taxes or some type of cut to benefits.

In the 1980s, for example, Social Security was in crisis, so lawmakers took action and increased the full retirement age (the age when you can retire with your standard benefit), delayed the cost-of-living adjustment that was due to retirees, imposed taxes on  Social Security benefits for the first time, and increased payroll taxes. Unfortunately, the change to FRA, the postponed COLA, and the new tax on benefits were all effectively cuts to  Social Security income that left retirees with less.

Compromises and tough choices will need to be made again, and some form of tax increases and benefit decreases seems likely to be necessary to fix the shortfall. So even if retirees don’t get a 22% cut and end up left with just 78% benefit of their benefits, they still need to worry about the fact that this is a possible outcome, as well as about what kinds of changes will be necessary to stop that cut from happening. Talking to a financial advisor about how to be prepared for these possibilities could be important for those who rely on Social Security or who plan to in the future.

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