This Possible Social Security "Fix" Would Act as an Indirect Benefit Cut to Millions of Americans

If you're counting on Social Security to cover a large share of your retirement expenses, the thought of a 22% benefit cut in six years should be terrifying.

But that is precisely what the numbers say will be necessary if the program's trust fund runs dry at the end of 2032, which it's on track to do. At that point, barring any changes, Social Security's only source of funding will be fresh wage taxes, which the Trustees estimate will only be enough to cover 78% of what American workers have been promised.

Fortunately, it's pretty unlikely that matters will play out quite that way. Washington is aware of the problem, and Congress will almost certainly step in at some point before 2033 to keep the program going for future generations. But we don't know yet what the fixes they will implement will look like.

There aren't many good options on the table. Many Americans will likely see their taxes rise, and millions could still face benefit cuts if Washington tries to use the same strategies it did last time Social Security was in trouble.

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How raising the full retirement age could cost younger workers

In the 1980s, when Social Security faced a financial future that could have required benefit cuts, Congress made some alterations to the program. It increased the payroll tax rate on workers and instituted benefit taxes on seniors for the first time. It also gradually raised the full retirement age (FRA).

Full retirement age is when you qualify for what the government's formula defines as your "full" benefit based on your work history. Claiming earlier reduces your benefits incrementally, while waiting longer to claim entitles you to incrementally larger checks (up until you hit 70, when those delayed retirement credits max out).

Before the changes, the FRA was 65 for all workers.

But under the 1983 reforms, the FRA increased first to 66, then leveled off for a few years, and then was bumped up in two-month steps over the course of six years to 67, where it has remained ever since. This didn't affect seniors at the time, but it acted as an indirect benefit cut for younger workers.

While someone with an FRA of 65 would have only seen their checks reduced by 20% for claiming at 62, for a person with an FRA of 67, claiming benefits at 62 means accepting a 30% cut to the size of their monthly checks. In most cases, boosting the full retirement age resulted in people receiving less in lifetime benefits than they would have if the FRA had remained at 65.

And now, today's workers face a similar threat.

Could Congress increase the FRA again?

There are no current plans to raise the FRA, though some elected officials have floated the idea as a possible way to address Social Security's funding shortfall. Many oppose the strategy because it would reduce benefits for today's workers, many of whom are already struggling to save for retirement.

There are other ways to fix the funding shortfall, so FRA may remain at 67 for decades to come. But right now, we can't be sure.

Regardless of what happens in Washington, your best plan is to focus on building a robust retirement nest egg so you're less dependent on your Social Security benefits in the future, and more prepared for whatever changes Congress might make to the program. But if that involves an FRA increase, you may need to rethink your retirement timeline.

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