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📂 Category: Social Security,Retirement Planning,Personal Finance
✅ Main takeaway:
Key takeaways
- The Social Security program is expected to run out of money by 2034, which could lead to a roughly 20% reduction in benefits.
- Capping cost-of-living adjustments for those who receive higher amounts of benefits could save the program $115 billion or more over a decade and keep it funded for longer.
One idea to solve Social Security’s funding gap would affect higher earners by capping the annual increase in benefits received.
The Social Security program is expected to exhaust its main trust fund in about eight years. A recent report from the Committee for a Responsible Federal Budget, a nonpartisan, nonprofit research organization, explored the idea of capping each beneficiary’s annual cost-of-living adjustments according to income level. This can help save the program money and ensure it stays funded longer.
Currently, the amount beneficiaries receive depends on how much they have made over 35 years and the age at which they start claiming their benefits. Their interest amounts increase annually to keep pace with inflation, which is calculated using the Consumer Price Index. For example, the most recent COLA will increase 2026 benefits by 2.8%.
Why is this important?
The main trust fund that the Social Security Administration uses to pay beneficiaries is expected to run out by 2034. The government must solve this problem before the reserves run out, otherwise benefits for 68 million beneficiaries will be reduced by approximately 20%, which the majority of beneficiaries say will not be able to survive financially.
According to the report, capping COLA aid for those who receive the top 25% of annual benefits would save the program $115 billion over a decade and reduce the solvency gap by about 10%.
On the other hand, Social Security advocates and some lawmakers have claimed that the current formula for calculating Social Security assistance does not adequately keep up with beneficiaries’ expenses, and that benefits are too low. One recent proposal introduced in the Senate would provide Social Security beneficiaries an additional $200 per month from January to the end of June next year.
How does this work?
The idea of the Committee for a Responsible Federal Budget would cap the COLA recipients receive each year. The maximum would be equal to the COLA received by a person who waited to claim until full retirement age and receives the 75th percentile amount of benefits.
Organizations have established a model with a maximum COLA of $900. For example, a beneficiary’s COLA may be worth $1,000 depending on his or her benefit level. However, the cap would only allow their benefits to increase by $900 the following year.
The proposed COLA maximum will also change depending on the age at which the beneficiary began receiving benefits. For example, if someone claims their Social Security benefits at age 62 in 2026, the cap will be reduced by 30%.
If they wait until full retirement age, the maximum will not decrease or increase according to their age. Additionally, the cap will be increased for those waiting to claim benefits until after the FRA.
This proposal is just one option lawmakers have as they look to close Social Security’s funding gap.
Experts and politicians suggested raising the profit ceiling, increasing payroll taxes, implementing a mechanism that automatically adjusts revenues or benefits when a shortage occurs, or investing money to grow the program’s income.
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