Editor’s Note: This story originally appeared on SmartAsset.com.
The Social Security Board of Directors announced last month that the trust fund partially responsible for paying benefits is expected to run out of money by 2033, which will likely lead some retirees to fear their monthly benefits will run out. before their death.
A study by the Center for Retirement Research at Boston College, however, illustrates why it’s essential to read past the headlines and understand how Social Security is funded.
Misinterpreting the news could cause some workers to claim their benefits earlier and forgo larger payments later.
How media coverage can impact your plans
Boston College’s Center for Retirement Research (CRR) conducted an online survey of more than 3,100 participants who received a news article about the long-term funding challenges facing Social Security.
The article was based on the Social Security Trustees’ 2020 Report, which predicted the trust fund would be depleted by 2034, when ongoing payroll taxes would continue to cover around 75% of benefits. Directors have since revised that projection in their 2021 report, saying the trust fund will be cash-strapped by 2033.
All study participants were given the same article to read, but with four possible titles. The headline presented to a control group simply said, “Social Security Faces a Long-Term Funding Gap.” The other three titles all specifically highlighted the eventual depletion of the trust fund:
- “The social security trust fund will exhaust its reserves in 2034”
- “A social security fund is heading towards insolvency in 2034, according to the trustees”
- “The projected income will only cover 75% of the social security benefits expected after 2034”
Each participant then answered a series of questions, including when the person plans to start collecting Social Security and how much they expect to receive. Those who saw one of the three headlines referring to the depletion of the Social Security trust fund said on average that they planned to claim their benefits about a year earlier than the control group (66).
Meanwhile, about 20% of all respondents said they did not expect to receive benefits at all. Some 34% expect to receive full or near full benefits, while the remainder expect their benefits to fall somewhere in the middle.
Those who received the fourth title, which noted that 75% of benefits will still be funded if and when the trust fund runs out, were more realistic about the future of Social Security, according to the study.
Claiming earlier means lower monthly payments
Why is this important? The CRR notes that if workers follow through on their intention to claim benefits earlier, they will freeze lower monthly payments.
“These findings suggest that media coverage of the trust fund has made many workers fear an unrealistic cut in their future social security benefits,” wrote Laura D. Quinby and Gal Wettstein of CRR.
“However, adjusting the narrative to include continuing earnings may not be enough to prevent workers from claiming early. If future beneficiaries follow through on their intention to claim a year earlier, they will lock in lower monthly benefits without increasing their savings to close the gap.
For example, a 50-year-old man who earns $ 75,000 a year would receive $ 35,229 a year if he claims Social Security at age 65. If he postpones Social Security for just one year and starts collecting at age 66, the same man will receive an additional $ 2,747 per year, according to SmartAsset’s Social Security calculator.
Again, claiming Social Security benefits earlier is not always a mistake. Waiting to produce may not be an option depending on a person’s financial situation, retirement income, and other factors, including health and life expectancy.
For example, the man in the example above would have to live to age 79 to compensate for the benefits he would have received at age 65.
What future for social security?
The CRR study shows that social security media coverage can not only inform a person’s understanding of the safety net, but also have an impact on how and when a person plans to claim their benefits.
While the trust fund is expected to run out over the next 12 years, that does not mean that the social security system will inevitably fail. Faced with similar long-term funding challenges in the past, Congress has acted.
In 1975, the administrators published a report which predicted that the trust funds for Old Age and Survivors Insurance (AVS) and Disability Insurance (AI) would run out of money by 1979.
As a result, Congress passed the 1977 Social Security Amendments, which increased the payroll tax from 6.45% to 7.65% and reduced benefits slightly to ensure stability of funds for the next 50 years.
However, short-term funding problems persisted in the 1980s, leading to further changes in 1983, including the taxation of benefits and the increase in the retirement age.
“Alarmists who claim that Social Security will no longer be there when today’s young workers retire do not understand or distort the projections,” according to the Center on Budget and Policy Priorities, a progressive think tank.
When planning for Social Security, it is important to understand that the program is funded by ongoing tax collection, in addition to an existing trust fund.
The CRR study shows that media coverage of the future of the trust fund may have an impact on when people consider starting to claim their benefits. While the OASI Trust Fund is expected to be depleted by 2033 under current conditions, Congress has already acted to secure the future of the program when it faces similar challenges.
A financial advisor can help you plan for retirement and determine the right time to start collecting Social Security. Find an advisor now.
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