What happens to benefits if Social Security runs out of money?

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Q. What happens if Social Security runs out of money or reduces benefits in the next decade? Wouldn’t it make sense to start collecting our fair share which we have earned as soon as age 62 before there is a drastic change to Social Security? And then what happens to younger generations?
— Full of questions

A. There’s a lot to unpack here.

Let’s start with concerns that Social Security could run out of money.

It’s important to understand how benefits work.

“Social Security retirement benefits are not a welfare program. You need to pay into it to get the benefit, and it is more of an insurance program,” said Marc Alan Lescarret, a certified financial planner with Marc Alan Wealth Management in Rockaway.

He said just like with an insurance company, when future payouts are expected to rise from longevity, adjustments must be able to offset the costs. In the case of insurance, this would be by either raising the deductible or increasing the premiums. For Social Security, it could be increasing the retirement age or increasing the taxes that come out of your paychecks, he said.

The life expectancy of individuals has increased.

“It is unfair that just because we are expected to live longer than in past generations, we can collect more benefits than previous generations,” Lescarret said,noting that Social Security is designed to be “actuarially fair.”

“If you live to be the average age of death, it should make no difference if you collected earlier or later in life,” he said.” When life expectancy increased, the administration was slow to react but did raise the full retirement age to make Social Security fairer.”

He said just because the full retirement age of Social Security is rising, it doesn’t mean benefits are reduced because we are expected to live longer.

“If medicine caused average life expectancy to reach 120, I wouldn’t be surprised if you had to wait until 100-plus to collect,” he said.

Now to your question about whether it makes sense to start collecting early in case there are changes to benefits.

Lescarret said possible changes would probably be gradual and could involve a higher full retirement age or raising or eliminating the Social Security cap on income.

“Social Security reform is politically unpopular, and no one wins an election raising taxes and reducing benefits,” he said. “When Social Security reform becomes more urgent, the politicians will likely gradually phase in the changes over many years.”

In terms of younger generations, Lescarret said he believes Social Security will exist in some form.

“It is not welfare. Social Security is insurance against living in absolute poverty at retirement,” he said. “Some also may refer to it as forced savings. Without it, many individuals living paycheck to paycheck would never retire.”

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This story was originally published on Nov. 10, 2022.

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