What will happen if Social Security benefits are cut in 2034

[joeea]

In replying to a question in a recently closed thread, I stated that I believed that benefits would be cut across the board in 2034 if Congress didn't act (rather than something more complicated, like aged-based cuts, or cuts based on income or wealth). Someone asked for a source for that belief. I'm pretty sure I heard it on a podcast at some point, but I wasn't sure. I hate to make claims without facts behind them.

So I asked Philip Moeller, co-author of Get What's Yours: The Secrets to Maxing Out Your Social Security what would happen if 2034 arrives and benefits must be cut.

He responded as follows:

"Should Congress fail to deal with Social Security's projected shortfall, benefits would be cut across the board. If the cut was 25 percent, for example, someone due $1,000 a month would get only $750."
​

Now I happen to think that Congress will indeed act before then, but probably at the last minute. I think Social Security will be funded at least for then-current recipients (like me) and their benefits won't be cut.

I'd be curious to hear if others think that benefits will indeed be cut for current recipients and if so, in what manner.

 

[Ian S]

We don't really know if there will even be a shortfall. What caused the exhaustion date to move up was the near depression we went through in 2009. People who aren't working don't pay SS/Medicare taxes! If the next decade's economy works out well, you'll see the SS projections change. In any event, IMHO a solution will be worked out and implemented before benefits are cut. That's what happened in the early 1980's and things were far more dire then. The baby boomer problem is not permanent and has been known and taken into account for decades. The wealthiest country in the world can certainly afford to take care of its elderly.

 

[W2R]

I have been listening to scare stories like this since the 1970's. Actually they were far worse in 1973 than what I am hearing now, IMO.

In 2034, I'll be 86 years old. An (unlikely) 25% cut in SS wouldn't even be a blip on my radar. We have been experiencing a huge stock market boom for almost an entire decade, and I will be in a far, far better financial situation than I ever expected.

If you are worried about it, design your retirement in such a way that SS is entirely used on discretionary spending and not needed for your bare bones survival expenses. But I wouldn't lose sleep over it.

 

[harley]

In replying to a question in a recently closed thread, I stated that I believed that benefits would be cut across the board in 2034 if Congress didn't act (rather than something more complicated, like aged-based cuts, or cuts based on income or wealth). Someone asked for a source for that belief. I'm pretty sure I heard it on a podcast at some point, but I wasn't sure. I hate to make claims without facts behind them.

So I asked Philip Moeller, co-author of Get What's Yours: The Secrets to Maxing Out Your Social Security what would happen if 2034 arrives and benefits must be cut.

He responded as follows:

"Should Congress fail to deal with Social Security's projected shortfall, benefits would be cut across the board. If the cut was 25 percent, for example, someone due $1,000 a month would get only $750."
​

Now I happen to think that Congress will indeed act before then, but probably at the last minute. I think Social Security will be funded at least for then-current recipients (like me) and their benefits won't be cut.

I'd be curious to hear if others think that benefits will indeed be cut for current recipients and if so, in what manner.

That's still just hearsay information to me. Is there an existing law that would mandate that? If so, does it specify the percentage to be cut? I'm not doubting you, but I would like to see the documentation to back that up. Personally I have great faith that our elected officials won't do anything unless forced by law. Leaving it to their sense of responsibility or initiative will result in disappointment, at best.

 

[ejman]

By 2034 I guess I will have collected somewhere around 1/2 a million dollars from SS. I hope they don't ask for it back...

 

[joeea]

That's still just hearsay information to me.

Sure. It's hearsay from one of the guys who "wrote the book" on Social Security.

 

[Car-Guy]

I never expected SS to be around, or that it would be cut back before I became eligible to collect "my earned" benefits, so I had already written it off. OK, I was wrong, again. My financial planning never counted on SS (still doesn't) so it won't bother me other than to give me the satisfaction that I was right about SS.

However, my guess (note, I haven't be right yet about SS) would be some sort of means testing would be enacted and SS would evolve into more of a welfare program than an entitlement program.

But who knows.... At this point, if I'm around, I can only hope I "understand" what's happening in 2034.

 

[donheff]

Who knows. I expect Congress will make some sort of changes in the interim and I'm not loosing sleep about it. If they fail to act it may be impossible for SSA to cut in a sensible way (e.g. a 25% reduction across the board for the entire year). The obligation to pay might force them to do so until the crisis arrived (like the debt ceiling) and then cut off all payments at once when the money runs out in the third quarter. I would hate to be in Congress when that happens.

 

[REWahoo]

I would hate to be in Congress when that happens.

You wouldn't have to worry about being there for the next term.

 

[Carpediem]

IMO...Since SS is the only source of income for so many Americans, a 25% haircut would have such a negative impact on so many citizens that I believe there is no way Congress would allow a haircut to happen to people currently receiving SS. If they did, there better be plenty of funds available for food stamps and other similar public services.

 

[Ronstar]

You wouldn't have to worry about being there for the next term.

Hopefully there would be enough of us left to vote them out.

 

[Cassius King]

Money flows to those without. I see a SS cut on a sliding scale of amount of assets. Those with no savings will not have a SS cut. Those who have saved and done the tough work will be cut.

 

[pb4uski]

The problem with that option is that it would undermine support for the program as a whole.... becoming just a different form of welfare.... so I doubt that it will happen.

 

[athena53]

The problem with that option is that it would undermine support for the program as a whole.... becoming just a different form of welfare.... so I doubt that it will happen.

Well, I asked Bob Myers (an actuary who was one of the original architects of SS) about means-testing SS years ago and he said that it was a bad idea because it would discourage personal savings because too much income form other sources would reduce your SS). They did it anyway, of course, by taxing SS benefits if you have any substantial income from other sources.

My guess is that they'll continue in this vein- easier to base it on income rather than assets- and that the penalty applied to SS if you have other income will continue to increase, but those with no savings will be unaffected.

 

[GravitySucks]

I'm planning on the whole thing being there. Old folks vote.
Also, a 25% cut means over a full percent of GDP would either be pulled out of the economy or moved to a different pocket. A big portion of that is spent on consumables. Whoever is in Walmarts and Amazons shoes in 2034 isn't going to be happy to see their piece of the pie shrink. Even if the politicians stops caring about voters, they're not going to upset their donors.

 

[Senator]

If you wonder "What if SS benefits are cut?", you also have to wonder "what if SS benefits are not cut?".

I do not worry about it. Not at all. Money can be printed.

 

[Rianne]

The Social Security Administration (SSA) announced that the maximum amount of wages in 2017 subject to the 6.2% Social Security tax (old age, survivor, and disability insurance) will rise from $118,500 to $127,200, an increase of more than 7%. By comparison, the 2016 wage base was unchanged from 2015.

 

[Car-Guy]

Money flows to those without. I see a SS cut on a sliding scale of amount of assets. Those with no savings will not have a SS cut. Those who have saved and done the tough work will be cut.

The problem with that option is that it would undermine support for the program as a whole.... becoming just a different form of welfare.... so I doubt that it will happen.

Medicare part B is already being means tested, so why not SS!

 

[Exrook]

In replying to a question in a recently closed thread, I stated that I believed that benefits would be cut across the board in 2034 if Congress didn't act (rather than something more complicated, like aged-based cuts, or cuts based on income or wealth). Someone asked for a source for that belief. I'm pretty sure I heard it on a podcast at some point, but I wasn't sure. I hate to make claims without facts behind them.

Here is a link to a presentation made by the Chief Actuary of the Social Security Administration on October 17 of this year:

https://www.soa.org/pd/events/2017/annual-meeting/pd-2017-10-annual-session-136.pdf

 

[calmloki]

After many years of owning rental property and not contributing to social security due to having mostly "unearned income" I was astounded to get my first SS check, based on military time and some other ill-spent employment time. If still alive seventeen years from now and SS is cut I guess the cat will have to do with dry food.

 

[RunningBum]

That's still just hearsay information to me. Is there an existing law that would mandate that? If so, does it specify the percentage to be cut? I'm not doubting you, but I would like to see the documentation to back that up. Personally I have great faith that our elected officials won't do anything unless forced by law. Leaving it to their sense of responsibility or initiative will result in disappointment, at best.

I haven't seen anything either, but I think the point is that the existing law is that they can't take money from elsewhere. So unless something is done by congress before 2034, SSA simply won't have the funds to distribute 100%. What would they do? I doubt they even have the ability to do any means testing or raise SS taxes. Do they even have the ability to limit when the give out knowing the lake is running dry? My guess is that once they have drained the reserves, they will only give out as much as they are taking in, which I believe is what's estimated to be 75%. I don't know how they could do anything but make cuts across the board. They are check writers, not policy makers. At that point, Congress might take other actions to either raise revenues or make uneven cuts.

It seems too hard to predict what Congress might do before 2034 or at the breaking point, and I don't think that was the OP's question. The question is what happens if no changes are made, right? What does the SSA actually have the authority to do?

I have a spreadsheet that shows what happens if I take SS at 62, 67, or 70, with 2% inflation and 5% investment returns factored in.

If benefits never change, or a change is made before I hit 62, the breakeven for taking at 67 is reached at 82, and for taking at 70 is reached at 86.

If a 25% cut happens in 2034, the breakeven point moves to 86 and 89.

If a 25% comes in 2031 when I hit 70 (worst case for waiting til 70), my breakeven is 88 and 94.

I've just turned 56, so I haven't spent too much time triple checking to make sure I did this right, and of course my assumptions could be way off. I still think my main factor will be starting SS when the stock market is down so I'm not selling low, and waiting until 70 if it's not down. What I consider a "down" market I haven't yet quantified, and if there are no changes to SS policy by the time I'm 62, I'm probably more likely to start in a "kind of" down market.

 

[Senator]

My guess is that once they have drained the reserves, they will only give out as much as they are taking in...

Interesting observation.

Where are these reserves located? And when they withdraw the reserves, where does that reserve money come from? Do they have to take in (additional) money to get funds for the reserves to be withdrawn?

 

[donheff]

Interesting observation.

Where are these reserves located? And when they withdraw the reserves, where does that reserve money come from? Do they have to take in (additional) money to get funds for the reserves to be withdrawn?

The reserves are numbers on an accounting ledger that have been loaned to the General Fund to meet the deficit (e.g., for day to day operations, wars, etc.). Just like your Treasuries are numbers on a ledger that have funded the same deficit. When SS payments start exceeding yearly incoming revenues (I think we are there already) the $ will come via the General Fund by selling more Treasuries. Those infusions will gradually cut the numbers on the Trust Fund until the ~2034 crisis.

 

[pj.mask]

If you wonder "What if SS benefits are cut?", you also have to wonder "what if SS benefits are not cut?".

I do not worry about it. Not at all. Money can be printed.

I don’t believe printing money for an inflation tied benefit is a feasible solution. At least not for one that is a large part of the economy like social security.

I have heard several (older) people say that the SSI trust has ‘been raided to pay for other things in the past’ - if they can take out they can put back. Budget question as to where it will come from though.

 

[Senator]

When SS payments start exceeding yearly incoming revenues (I think we are there already) the $ will come via the General Fund by selling more Treasuries.

Why can't they just sell more Treasuries even after the reserves are exhausted?

I don’t believe printing money for an inflation tied benefit is a feasible solution.

Is selling more treasuries different than printing money?