Grasping the Evolution of Social Secuirty

By: Conor O'Malley

For most Americans, Social Security is the only source of guaranteed income-- but prior to retirement, many don’t take the necessary steps to fully understand the Federally mandated program. As we approach an era where more people are retiring than ever before, understanding the recent changes to Social Security is crucial for pre-retirees and retirees alike. The system has undergone several updates in recent years, some of which impact how benefits are calculated, when they are claimed, and how much retirees can expect to receive. This blog outlines the most significant changes, helping you stay informed as you plan for your financial future.

Major Social Security Changes Throughout the Years

1. Full Retirement Age (FRA) Increase 

One of the most notable changes has been the gradual increase in the Full Retirement Age (FRA), the age at which individuals are eligible to receive 100% of their Social Security benefits. This shift is a result of amendments made in the 1983 Social Security Reform Act, designed to accommodate longer life expectancies.

• Previously: For many years, the FRA was 65 for most retirees.
• Current Situation: The FRA is now between 66 and 67, depending on your birth year. For those born after 1960, the FRA is set at 67.

With the phase-in period finally ending in 2022, Full Retirement Age is locked-in at 67 for Americans who turned 62 in 2022 and later. 

2. Cost-of-Living Adjustments (COLA) 

Social Security benefits are adjusted annually to keep pace with inflation through the Cost-of-Living Adjustments (COLA). These adjustments are determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In recent years, COLA increases have been somewhat modest, but the numbers have fluctuated based on economic conditions.

• 2022 COLA Increase: 5.9% – the highest increase since 1982, reflecting the high inflation rate during that period.
• 2023 COLA Increase: 8.7% – even higher than 2022, driven by persistent inflation.
• 2024 COLA Increase: 3.2% -- inflation slowed, allowing a lower bump. 
• 2025 COLA Increase:  2.5% -- which some may find not to be enough, click here to gauge your progress towards retirement and see where you stand! 

These increases are meant to help retirees maintain their purchasing power in an environment of rising costs, especially in areas like healthcare, housing, and food. 

3. Earnings Limits and the Earnings Test 

For individuals who claim Social Security benefits before reaching their FRA and continue to work, there are limits on how much they can earn without reducing their benefits. The earnings limits have increased slightly over the years, allowing retirees more flexibility to work part-time or in a lower-paying role without significantly reducing their benefits.

• 2025 Earnings Limit for Those Under FRA: $23,400 – exceeding this limit results in a $1 deduction from benefits for every $2 earned above the threshold.
• 2025 Earnings Limit in the Year Reaching FRA: $62,160 – exceeding this limit results in a $1 deduction for every $3 earned above the threshold, but only during the months before you reach FRA.

Once an individual reaches their FRA, there is no limit on how much they can earn, and benefits are no longer reduced, regardless of income.

4. Spousal and Survivor Benefits 

Another critical aspect of Social Security involves spousal and survivor benefits, which allow a spouse or dependent to claim benefits based on a worker's record. In recent years, there hasn’t been a dramatic change in the structure of these benefits, but the increasing FRA and changes to COLA can impact the amount a spouse or survivor can receive.

• Spousal Benefits: Eligible spouses can receive up to 50% of the worker's benefit amount if they claim at their FRA.
• Survivor Benefits: A surviving spouse can receive up to 100% of the worker's benefits, but the amount may be reduced if claimed before the survivor’s FRA.

Upcoming Challenges and Future Proposals

1. Social Security Trust Fund Depletion

A looming issue that has generated concern is the potential depletion of the Social Security Trust Fund. According to the 2024 Trustees Report, the trust fund that supports Social Security benefits could be depleted by 2035 if no legislative changes are made. If the trust fund runs out, Social Security would still be able to pay out around 83% of scheduled benefits, but this reduction would significantly impact retirees' incomes.

To address this, policymakers have proposed several solutions, including:

• Raising the payroll tax cap: Currently, only income up to $176,100 is subject to Social Security taxes in 2025. Raising or eliminating this cap could help fund future benefits.
• Raising the FRA: Some proposals suggest raising the FRA beyond 67 to reflect further increases in life expectancy.
• Modifying COLA calculations: Some lawmakers propose changing the formula for calculating COLA to reduce benefit increases over time.

2. Proposals to Improve Benefits 

While much of the discussion has centered around how to shore up Social Security’s finances, there are also proposals to increase benefits for certain groups:

• Enhanced benefits for lower-income workers: To ensure that Social Security provides more robust support for retirees who had lower lifetime earnings.
• Caregiver credits: Some proposals suggest offering caregivers additional credits toward their Social Security benefits, recognizing the economic value of unpaid caregiving work.

What These Changes Mean for You

As Social Security continues to evolve, it’s important to stay informed and adjust your retirement strategies accordingly. Whether it's understanding the implications of the increased FRA or taking advantage of the COLA boosts, these changes will affect how much you can expect to receive and when. Here’s what you can do to stay ahead:

• Plan for a Later Retirement: With the FRA gradually increasing, delaying benefits can be advantageous, resulting in a higher monthly payout.
• Maximize Your Earnings: For those working while receiving benefits, staying below the earnings limit (if applicable) can prevent reductions in your payments.
• Stay Informed on Legislative Changes: With proposals to modify the Social Security system constantly being debated, keeping an eye on developments will help you make timely adjustments to your retirement plans.

Conclusion

The recent changes to Social Security reflect broader economic shifts and demographic trends. As lawmakers continue to grapple with the future of this vital program, being proactive in your financial planning will help you navigate the challenges and opportunities ahead. If you are nearing retirement, it's wise to consult with a financial advisor to optimize your Social Security strategy and ensure a more secure financial future.

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