Estate and Tax Planning
Private Fiduciary Services
Retirement Planning
Long Term Care
Risk Management

Reduction in Social Security Benefits

June 6, 2011 | Filed Under Finance, Retirement Savings, Tax Articles | Comments Off

Social Security has been a heavy burden upon the government for some time.  The number of baby boomers reaching retirement will flood the Social Security roll call to an unsustainable level.  The government has borrowed against Social Security, leaving it highly susceptible to collapse.

In an effort to solve the Social Security dilemma, if at least for political gain, proposals are being offered to reform the program to shore up it’s financial coffers.

One of the proposals suggests changing the formula used to calculate the Cost-of-Living-Adjustment(COLA).  Automatic annual increases to benefits occur to offset the rising cost of living…inflation. The modification would reduce the increase by three tenths of one percent(0.3%).  The adjustment for inflation is a valuable aspect of Social Security, one not often found in pension benefit programs.   A reduction in the adjustment, however slight, will erode further the retirees’ ability to survive financially.

As it stands today, an estimated 29% of Americans in the second-highest income bracket will run short of money after 20 years in retirement and approximately 40% in the lowest pre-retirement bracket will run short in just 10 years, according to projections by the Employee Benefit Research Institute(EBRI)’s 2010 Retirement Readiness Rating ™.

A 0.3% reduction may not sound like much,  but the impact will have a compounding effect on the benefits one receives and is predicted to be almost immediate with no grandfathering in of current recipients to the old rates.   Compounding interest is great when it is in your favor, but it will eat away at your buying power when it is against you.

The National Academy of Social Insurance(NASI) estimates a 3.3% reduction in the COLA will cut lifetime benefits by about 9% for someone reaching the age of 92.


Here are 5 Tips to counter measures proposed to reduce one’s overall Social Security benefits:

  • Save as much as you can now.  A rule of thumb is 10% of your income.
  • File for Social Security benefits later rather than earlier.  The longer you wait to draw on Social Security, the greater the benefits you may receive over your lifetime.  For example, someone starting to take benefits at age 62, will likely receive 25% less in benefits then someone who waits until the age of 66.   If you wait until age 70, your benefits could increase by as much as 32%!
  • Keep working.  Not a prospect most of us are looking forward to, but the longer you work, the more you can contribute to your 401(k) with hopefully company matches.  You’ll also delay onset of receiving
  • your SS benefits.
  • Reduce  your fixed costs, in particular, your mortgage.
  • Stay ahead of inflation with investments that outperform or at least keep pace with inflation.

Some reform measures look to raise the retirement age(this is just a forced delay in taking your Social Security benefits…one that profits the government and not you), or raising Social Security taxes.  These ideas I think will merely benefit the politicians and hurt the rest of us.  Reducing the Cost-of-Living-Adjustment would keep a little more in the Social Security storehouse, and will seem less of a threat to many retirees lifestyle, that it may just pass.  This however, is seen by some experts to be a bigger threat to retirees future financial security.