ALLY DONNELLY: What steps can people take to prepare for the potential of a Social Security shortfall?
MAURA CLOW: Well, we don't know exactly what's going to happen in the next six years. The message is to have a plan.
ALLY: Maura, there are concerns about the future of Social Security. The fund's trustees say it could run out of money in 2032. So what could that mean for retirees? I mean, how much could Social Security benefits be cut if the program isn't fully funded?
MAURA: My clients are asking me this every day. Monthly checks will not go away. But here's what could change. The OASI Trust Fund is projected to run out of reserves in late 2032. Today, payroll taxes cover most scheduled benefits, with the OASI Trust Fund making up the difference. Without money from the fund, incoming revenue is projected to cover only 78% of scheduled benefits.
ALLY: Let's drill down there. If Social Security runs out of money, what kind of hit could my benefits check take?
MAURA: So as an example, if benefits are reduced and that is a big if, it would be a 22% cut. For a hypothetical retiree getting a $2,000 monthly benefits check, that would mean a cut of $440.
ALLY: That could be real money out of the pockets of millions of Americans who've paid into the program for their whole lives. So what should we do? I mean, what steps can I take to prepare for a potential Social Security shortfall?
MAURA: It does depend on your age and how soon you may start collecting. The most important thing we can do is to look at our Social Security benefits and model in any potential cuts. At any age, we can stress test a financial plan against possible benefit cuts in Social Security.
ALLY: All right. So let's talk some of those different age groups starting with the most imminent. Let's say I'm already in retirement.
MAURA: Well, some good news there. Historically, people who are currently receiving Social Security benefits experience the least amount of impact.
ALLY: So if I'm getting closer to retirement, closer to that 2032 date, what should I be thinking about?
MAURA: Again, we don't know exactly what will happen, but we do want to start considering a few things. One most important thing is, when will you start collecting Social Security? At age 62, you will receive 70% of your benefit and that 30% cut is permanent. At age 67, you will receive 100% of your full retirement benefits. If you delay to age 70, you'll receive 124% of your retirement benefits.
ALLY: What am I weighing? What goes into deciding when I want to claim?
MAURA: There's a lot of different factors that go into that. Number one, are you still working? Are you financially able to delay? What's your health and your life expectancy? You also may want to look into your spousal benefits. Sometimes spousal benefits may be more than your own benefit.
ALLY: What about catch-up contributions? What role could they play?
MAURA: Oh, catch-up contributions are a great thing to add to a financial plan. Workers over the age of 50 can contribute more to their IRAs, Roth IRAs, and 401(k)s thanks to catch-up contributions. Also, if you're contributing to a 401(k)s based on your income level, that money may have to go into an after-tax Roth contribution. Similarly, health savings accounts allow for catch-up contributions for anyone over the age of 55.
ALLY: Let's back up for a second. If I'm younger, how should I be thinking about Social Security?
MAURA: Historically, younger workers do have the most impact with any Social Security changes, but they have the longest time to prepare.
ALLY: So if I'm younger, should I be assuming Social Security won't be there for me when I retire?
MAURA: No, not at all. Congress has always found a way to make sure Social Security benefits have been paid.
ALLY: For workers who are not collecting Social Security yet, is the message simply save more?
MAURA: The message is to have a plan. Look at your retirement savings. Look at your brokerage accounts. See if there are any tweaks, big or small, that can be made to give you a more flexible, stronger plan.
ALLY: Are there plans in place to keep this from happening? I mean, what would it take to fix Social Security and make sure it's fully funded?
MAURA: Congress needs to take action. Ideas that have been discussed have been raising the retirement age, raising the Social Security payroll tax, and reforming how the income cap is calculated.
ALLY: Let's talk through some of those limits. So, what is the full retirement age for Social Security as it stands now?
MAURA: The full retirement age for Social Security is 67 for anyone born after 1960. There are also some income limits we want to consider. Any income that you earn above $184,500 is not taxed at that 6.2% Social Security tax. I also want to point out that there's also a maximum that you can receive from Social Security each year, despite how much you've put into it.
ALLY: Okay, this is six years from now. So, let's say one more time, this is not a done deal.
MAURA: Correct. Congress has historically always found a way to fund Social Security. This is certainly a story to pay attention to and see what changes, if any, come to Social Security. But what it really does is put a spotlight on the need to build and maintain a strong and flexible financial plan.
ALLY: Terrific. Maura, thank you. If you need help figuring out how Social Security is going to fit into your retirement plan, reach out to a Fidelity professional. You can log on to Fidelity.com for help and start the conversation. Thanks for watching Fidelity Viewpoints.
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