The US Social Security Administration (SSA) has been predicting for years that due to the continuously growing funding gap, the administration will be forced to reduce social security benefits. The agency forecasts that unless Congress enacts some reforms, benefits will have to be cut after 2033. One proposed reform is to increase the retirement age for receiving full social security benefits.
According to CNBC, Social Security is in need of reform because by 2034, the SSA will only be able to pay approximately 80% of regular social security benefits. This would be disastrous for retirees and soon-to-be retirees who rely on this retirement income. Currently, any retiree can only receive full benefits by retiring at age 67 and a few months. Some Republican proposals include raising the retirement age to 70 to apply for Social Security and receive full benefits.
While there are other suggestions, Congress is still debating whether this is the optimal choice – or even a good one. Raising the retirement age for Social Security could help address the financial issues of the program but may harm many low-income individuals.
There are two major reasons for the financial difficulties of Social Security. Firstly, people are living longer. In 1983, when the full retirement age was first increased, the average life expectancy of Americans was 74.37 years, but it is now 79.25 years. Secondly, there are not enough younger working population to offset future shortages. This is due to a decrease in the number of children being born to women.
Although Congress has not reached any agreement yet, this change is unlikely to affect those who are already retired. It is also unlikely to affect those close to retirement age, widows, or disabled individuals already receiving benefits. It is currently impossible to predict all potential issues that changing the retirement age could cause. Some potential complications include:
Delaying retirement means many, especially among the poor and minority populations, will receive lesser benefits as their lifespans are shorter compared to other groups. These groups often encounter health issues earlier, which may force them into early retirement – where Social Security benefits might not be available to them.
Many workers may have to work until age 70 instead of retiring at 67 to receive full Social Security benefits. Many may not be able to do so due to health issues, causing them to exit the labor market. The age to claim early Social Security benefits (currently at 62) could also likely be adjusted. If the early claiming age is raised to 65, many individuals might pass away before becoming eligible. Even if in good health, they would have to wait an additional three years to apply for early benefits, meaning they would receive 30% less benefits than waiting for full retirement age.
Currently, it seems unlikely that the age to qualify for Medicare will change, though it’s a possibility. Nevertheless, lower-income individuals might not afford Medicare costs if full Social Security benefits begin at 70, given poorer health and the need for early retirement. If they stop working, they will still need to purchase Medicare at 65. It is possible to access Social Security before reaching full retirement age, but this would result in reduced benefits. The age to start Medicare (currently at 65) could also be subject to change. Currently, individuals must register around the age of 65 if not actively working.
Due to rising costs of living and inflation, many individuals may need to begin tapping into other retirement accounts like IRAs or 401(k)s. Instead of waiting until 73 to start mandatory minimum distributions, they could withdraw earlier, reducing taxes during later RMD years. Withdrawing funds from larger retirement accounts earlier can prevent being pushed into higher tax brackets post-retirement and potentially avoid paying higher Medicare premiums based on income.
Currently, maxing out Social Security benefits would mean starting at 70. If retiring at 70 still applies for receiving maximum benefits, it could cause confusion unless this age is also postponed.
You may discuss retirement income planning with a financial advisor to better prepare for retirement. Do not wait until close to retirement age to learn more.