Social Security benefit payments constitute the cornerstone of income for the majority of American retirees. For existing and potential reverse mortgage borrowers alike, keeping up-to-date on any changes in the Social Security program will prove to be essential information for anyone taking a proactive approach to retirement planning.
Always a flashpoint of ongoing debate and discussion by lawmakers in Washington, D.C., there are a series of forthcoming and potential changes to the way that Social Security operates in America. 6 of these potential changes were recently explored by finance writer and certified financial planner David Rae in a piece at Forbes.
Debate about cutting the payroll tax
As worries continue to linger about the possibility of an oncoming economic downturn, a proposal being discussed by the White House to provide short-term economic stimulus could have an effect on the Social Security trust fund.
“Donald Trump has thrown out lowering the payroll tax in an attempt to spur the economy,” Rae writes. “If the government takes this action, the Social Security trust fund would likely be depleted faster.”
At last report, the Social Security trust fund is set to exceed its income in 2020, the first time such an occurrence will have taken place since 1982. If no corrective action is taken on a legislative level to address the program’s financial shortfalls, then the Social Security trust fund will be depleted by the mid 2030s.
Lowering the payroll tax is a measure that previous administrations have implemented in order to spur economic activity. It was taken most recently by Congress under President Obama in 2011 and 2012.
Increasing the retirement age
The full age for full retirement has been increased to 67 for everyone born on or after 1960. However, retirement benefits can be partially accessed for anyone who has reached the age of 62, Rae says.
“For those still a few years away from retirement, those born in 1960 or later, the full retirement age has increased to 67,” Rae writes. “You will still be able to start taking Social Security Retirement Benefits at age 62, but with reduced monthly payments.”
The age increase for full retirement was first mandated by Congress in the 1980s in order to strengthen the financial standing of the Social Security program, and legislators also cited improvements in the health of older people and increases in life expectancy as some of the factors that justified the increase, according to AARP.
Expected cost of living adjustment (COLA)
Social Security benefit payments will undergo an adjustment to keep pace with levels of inflation. While not an abundant increase in the payments that beneficiaries will receive, it should be a welcome change for those who receive Social Security checks.
“For 2020, the Social Security cost of living adjustment is expected to be around 1.8 percent,” Rae writes. “Not life-changing, but if you are living off of Social Security alone, every penny counts. For the average retiree, this would likely amount to around $25 more per month. For the highest earners, this could come closer to $50 more per month in Social Security retirement benefits.”
This anticipated COLA is smaller than the one observed in 2019, which was the highest COLA that the program had seen in seven years. While any COLA is a welcome sign for beneficiaries, reverse mortgage originators still emphasize that there is a need for other financial strategies.
“The reverse mortgage is a great need in itself, and this small cost of living adjustment is definitely not going to save someone from losing a home or paying their mandatory obligations like insurance and taxes,” said Sue Milligan, an originator with First Choice Loan Services in a February interview. “It won’t be enough money to pay off an existing mortgage. Those are still needs that people have every single day, like through a medical expense.”
Increase in maximum benefits
Those at the higher end of the income scale are expected to see their Social Security benefits increase modestly in 2020.
“For workers near the top of the Social Security income scale, $132,900 or more for 2019, your maximum Social Security payout will likely increase slightly in 2020,” Rae writes. “No individual at full retirement age can take home more than $2,861 per month, regardless of their pre-retirement income. This number can be increased by delaying Social Security until the age of 70.”
Rae also emphasized that delaying taking Social Security benefits until age 70 can provide a notable increase in benefit payments.
“In case you were wondering, waiting till 70 could increase your Social Security benefit by 32% compared with the starting benefit at 66,” he says. “This takes the maximum monthly benefit up to about $3,776 per month.”
More Social Security benefits will be taxed, end of maximization strategies
Social Security benefits are taxable, but the amount taxed depends on a household’s income levels, Rae says.
“Just fifty percent of your benefits will be taxed if your income is between $25,000 and $34,000 as an individual,” Rae writes. “That goes up to $32,000 to $44,000 for a married couple, still another example of the marriage penalty.”
Additionally, a couple of key Social Security benefit maximization strategies will no longer be available to younger people.
“File and suspend was a great social security maximization strategy that is no longer available to younger Americans,” he writes. “The last few baby boomers who were grandfathered into eligibility will turn 70 in 2020. Seventy is the latest you can wait to start your Social Security benefits.”
Read the story at Forbes.