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3 Potential Social Security Changes to Watch

3 Potential Social Security Changes to Watch

3 Potential Social Security Changes to Watch

Social Security accounts for at least 50% of income for half of senior married couples and for seven in 10 unmarried seniors. That makes it a vital source of retirement money for millions -- and it means every current and future retiree has a vested interest in ensuring its future financial stability.

The fact is, while Social Security keeps millions of seniors out of poverty, it's not in the best financial shape itself. The program's trust fund is at risk of running short of money in 2035, which would mean benefits could only be paid from revenue being collected. That would leave a shortfall that would necessitate a 24% cut.

Retirees can't afford to take such a big hit, and politicians can't afford to let them, as seniors are one of the more reliable voting groups. That means change is inevitable to shore up Social Security, although modifying the program will be hard and lawmakers could very well kick the can down the road a few years before they act.

Sometime over the next few years, however, there are three potential Social Security changes to watch out for.

Image source: Getty Images.

1. A change to full retirement age

Full retirement age (FRA) is the age when you can get your standard benefit. For those born between 1943 and 1954, it's 66. Everyone whose FRA is 66 will have reached that age by the end of 2020, so going forward FRA will be later for all future retirees. It'll be between 66 and 67, with everyone born in 1960 or later hitting FRA at 67.

This change to FRA is already baked in because it was signed into law when lawmakers amended Social Security in 1983 to shore up its finances. But it's very possible there will be future changes that push FRA to an even later age. That's because any compromise bill to fix Social Security's financial problems is almost assuredly going to include a later full retirement age. After all, the 1983 compromise bill pushed FRA to a later age due to lengthening life spans, and people are now living longer than they did back then.

2. An increase in the payroll tax

Raising full retirement age can help shore up Social Security's finances because it'll mean retirees get less lifetime benefits. But simply reducing the income future seniors receive isn't going to be enough -- especially as it won't be politically popular to modify FRA and any change is likely to be phased in over a long time, as it was after the 1980s modifications.

Since cutting benefits isn't enough of a fix, revenue will have to be raised. With Social Security getting the bulk of its funding from payroll taxes collected from current workers, these taxes will almost assuredly go up as part of any compromise plan to stabilize the program's finances over the long haul.

The big question is whether they go up across the board, with all workers paying more, or whether they'll be raised only for the wealthy. President-elect Joe Biden has come up with a plan to add taxes only for higher earners (and not provide a resulting increase in benefits). It's not likely to be popular with Republicans, though, and it may not be enough to solve the financial shortfall, so it's possible an across-the-board tax increase may be necessary.

3. A change in the way COLAs are calculated

President-elect Biden has proposed changing the formula used to determine how much of an annual benefits increase Social Security retirees get. Currently, seniors get a raise determined by year-over-year price changes measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This isn't necessarily the right way to measure rising costs for seniors, so Biden wants to instead use a consumer price index targeted to the elderly called CPI-E.

However, if a change is made from CPI-W to CPI-E, that would be a de facto benefits increase since seniors would get larger raises. Past plans to fix Social Security's financial shortfalls have instead involved switching to something called "chained CPI," which would result in smaller raises because it assumes people change buying habits as prices rise (switching to pork instead of beef, for example, if beef prices go up).

Changing to chained CPI would be a de facto cut because benefits would go up more slowly. However, such a change has received some bipartisan support in the past. President Obama, for example, indicated a willingness to change CPI as part of a grand bargain to shore up Social Security that never happened.

It's not clear which modification is most likely, if either -- but since there are several different alternatives to CPI-W on the table, there's a very real chance the method used to calculate cost-of-living adjustments (COLAs) could change in the future.

The bottom line is, future retirees can't count on benefits looking the same as they do now -- which makes it more important than ever to save plenty of money to supplement Social Security in case they aren't as generous in the future as they are for current retirees.

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