Newsflash, America: Your Social Security benefits are already being cut


Social Security is, for many Americans, a financial lifeline that keeps them safely above the poverty line during retirement and allows them to pay their bills during their golden years. According to the Center on Budget and Policy Priorities, if Social Security didn't exist, an estimated 40.5% of seniors would be living in poverty. However, with Social Security, just 8.8% of seniors are living below the poverty level.

Despite Social Security representing such a critical source of income for retired workers, its future remains in doubt. Thankfully, that doubt does not involve insolvency. Social Security isn't in any threat of going bankrupt, and it will be there for future generations of Americans. The Social Security Trust is primarily funded by the payroll tax, and as long as Americans are working and paying taxes, there will always be money generated for the program to pay out.

The primary concern for Social Security is tied to two ongoing demographic shifts. First, baby boomers are retiring at a rate of more than 10,000 persons per day, meaning the worker-to-beneficiary ratio is on the decline. Secondly, life expectancies have trended higher over the past five decades by an aggregate of nine years, according to the Centers for Disease Control and Prevention, allowing seniors to pull benefits for a longer period of time.

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The 13 states that tax Social Security benefits
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The 13 states that tax Social Security benefits

Colorado

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Connecticut

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Kansas

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Minnesota

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Missouri

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Montana

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Nebraska

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New Mexico

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North Dakota

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Rhode Island

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Utah

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Vermont

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West Virginia

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Both issues are expected to exhaust Social Security's more than $2.8 trillion in spare cash by 2034, at which point, the Social Security Board of Trustees estimates an across-the-board benefits cut of up to 21% may be necessary to sustain the program through the year 2090. With Gallup finding, in its latest Social Security poll, that nearly nine out of 10 seniors are reliant, to some degree, on Social Security income each month, a 21% cut could prove devastating.

Surprise! Your Social Security benefits are already being cut

But I have a newsflash for working Americans and pre-retirees: Your Social Security benefits are already being cut, whether you realize it or not.

On April 20, 1983, the Social Security Amendments of 1983, the last major overhaul of Social Security, were signed into law. These Amendments impacted when future cost-of-living adjustments were calculated, adjusted FICA tax rates (i.e., the percentage workers pay into Social Security and Medicare via the payroll tax), and made adjustments to the full retirement age. The added emphasis on this last component is my own, because it's what we're discussing today.

Your full retirement age is the age at which the Social Security Administration deems you eligible to receive 100% of your benefit, which is determined by averaging your monthly income over your 35 highest-earning years. If you claim benefits prior to hitting your full retirement age -- you can claim as early as age 62 -- your payout is reduced. Conversely, waiting to file until after your full retirement age can lead to an even larger monthly payment. On average, Social Security benefits grow by 8% for each year that you hold off on claiming, up to age 70.

Prior to the Social Security Amendments of 1983, the full retirement age for retired workers was age 65. In simpler terms, a retiree could claim Social Security benefits at age 65 and receive 100% of what they were due on a monthly basis. The Amendments of 1983 set out a timetable by which the full retirement age would increase from 65 years to 67 over the coming four decades. This move was made to reflect the aforementioned increase in American life expectancies. You can find your retirement age, which is determined by your birth year, using this Social Security retirement table.

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10 Social Security rules everyone should know
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10 Social Security rules everyone should know

6.2 percent payroll tax

Most workers pay 6.2 percent of their earnings into the Social Security system, and employers match this amount. Self-employed workers contribute 12.4 percent of their income to Social Security. You can see how much you have paid in and check that your earnings have been recorded correctly with a my Social Security account.

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$127,200 tax cap

This is the Social Security maximum taxable amount of earnings in 2017. Earnings above the tax cap aren’t taxed by Social Security or used to calculate retirement benefits. Workers who earn more than $127,200 in 2017 will notice a bump in their paycheck when Social Security taxes stop being withheld.

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35 years of earnings

Your Social Security payments are calculated using the 35 years in which you earn the most. If you don’t work for at least 35 years, zeros are averaged in and will reduce your retirement payments. Working for more than 35 years can improve your payments because your lowest earning years could be dropped from the calculation.

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$1,360 average payment

Retired workers will receive an average Social Security payment of $1,360 per month in 2017. Retired couples bring in an average of $2,260 monthly. Payments are adjusted each year to keep up with inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. Cost-of-living adjustments have ranged from zero in 2010, 2011 and 2016 to 14.3 percent in 1980.

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Initial eligibility at age 62

Workers first become eligible to start retirement benefits at age 62. However, monthly payments are reduced by 25 or 30 percent if you claim them at this age, depending on your birth year. For example, a baby boomer who qualifies for $1,000 per month from Social Security at age 66 would get a reduced payment of $750 per month if he elects to sign up for Social Security at age 62.

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The baby boomer full retirement age is 66.

People born between 1943 and 1954 are eligible to claim unreduced Social Security benefits at age 66. The full retirement age then gradually increases from 66 and two months for people born in 1955 to 66 and 10 months for those with a birth year of 1959.

The full retirement age will increase to 67.

People born in 1960 or later become eligible for the full retirement benefit they have earned at age 67. Millennials and members of generation X need to wait a year longer than the baby boomers and two years longer than their grandparents to claim their full retirement benefit.

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Maximize your monthly payments at age 70.

Social Security payments increase each month you delay starting your payments up until age 70. After age 70 there is typically no additional benefit to waiting to sign up for your benefit. Retirees can boost their monthly payments by 24 to 32 percent, depending on their birth year, by claiming Social Security at age 70.

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$16,920 earnings limit

If you work and collect Social Security at the same time at age 65 or younger, part of your Social Security payments could be temporally withheld if you earn more than $16,920 in 2017. Beneficiaries who exceed the earnings limit will have $1 in benefits withheld for every $2 in income above the limit. Those who turn 66 in 2017 have a higher earnings limit of $44,880, and the penalty declines to $1 withheld for every $3 in excess of the earnings limit. However, once you turn 66, there’s no benefit reduction for working and claiming benefits at the same time, and your payments will be increased to give you credit for payments that were withheld in the past.

$25,000 in retirement income

If the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefits exceeds $25,000 ($32,000 for couples), half of your Social Security benefit becomes subject to income tax. And if these income sources top $34,000 ($44,000 for couples), income tax could be due on 85 percent of your Social Security payments.

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For persons born between 1943 and 1954, the full retirement age was 66 (over the past 12 years). However, beginning in 2017, the full retirement age will begin rising by two months per year until it reaches age 67 in 2022. Raising the full retirement age has the effect of reducing payouts for all future retirees with a birth year of 1955 or later.

For example, retired workers born in 1955 who choose to claim Social Security at age 62 this year could be subject to a reduction of up to 25.8% in their payouts, which is a bit more than the maximum reduction of 25% for those born between 1943 and 1954 who claimed Social Security at age 62 over the previous 12 years. Similarly, waiting until age 70 to claim benefits will only increase payouts by 30.7% for people born in 1955, which compares to the 32% "bonus" that people born between 1943 and 1954 received by waiting until age 70.

Raising the full retirement age means seniors need to either wait longer to receive their full benefits, or they need to be willing to accept a steeper haircut in their monthly payout than seniors in previous years.

For today's working Americans, Social Security benefits are already being cut -- albeit these cuts were planned decades in advance. The only question now is if further cuts may be needed to sustain the program for future generations.

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