Personal Finance

Want to know how a Social Security benefit cut would affect you? There are calculators for that

Key Points
  • Social Security may not be able to pay full benefits after a certain date if Congress doesn't act soon.
  • That may prompt many Americans to claim their monthly retirement checks early, due to fears benefits could run out.
  • Social Security calculators offer a way to gauge how much less you may receive from the program.
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Many Americans are pessimistic about the future of Social Security, and the pandemic has made it even worse.

A recent survey found 59% of people now worry more about Social Security running out of funding than they did before the onset of Covid-19, according to Nationwide Retirement Institute.

And that is changing their outlook on one of the biggest decisions they will make in their lives — when to claim Social Security retirement benefits.

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Almost 1 in 5, or 19%, of survey respondents said Covid-19 has changed their plans to file for Social Security benefits, with 9% planning to file earlier and 11% delaying filing.

Meanwhile, 42% of respondents plan on filing for Social Security benefits early while continuing to work, up from 36% who said the same in 2021.

Yet a recent Social Security trustees annual report that was the first to consider the effects of the pandemic struck a slightly more optimistic tone. The report projected a new depletion date of 2035 for the program's funds, one year later than had been projected in 2021. Assuming Congress takes no action in the intervening years, at that time, 80% of benefits will be payable.

Social Security trust fund good through 2034, SS Disability fully funded for 75 years
Social Security trust fund good through 2034, SS Disability fully funded for 75 years

The depletion date for the fund dedicated solely to retirement benefits (the Old-Age and Survivors Insurance trust fund) was also bumped to one year later to 2034, at which point 77% of benefits will be payable.

To get an idea of how much of a haircut your retirement benefits may take, using a reputable Social Security calculator may help.

How to calculate the impact of a benefit cut

Covisum, a provider of Social Security claiming software, recently updated its calculator to reflect the Social Security trustees' latest projections. That includes a free version for consumers and a more complex paid version for financial advisors.

Another product, Maximize My Social Security, lets consumers evaluate which claiming strategy might best suit them for a $40 annual fee. It also has a separate version for financial advisors.

The free Covisum calculator can help individuals do a quick calculation based on their benefits alone and some key facts — year of birth, full retirement age benefit amount, percentage of the benefit cut and the year that benefit cut occurs.

So someone turning their full retirement age this year, for example, can calculate the effect of a 23% reduction in benefits starting in 2034, as well as the effect of no benefit cut. For each scenario, the calculator will show the value of claiming either at age 65 or age 70, and when beneficiaries stand to get the maximum amount possible from the program. As beneficiaries live longer, the value of waiting to claim until 70 goes up, as demonstrated in the difference in total benefits per the tool's calculations.

To be sure, the free calculator is just a starting point when it comes to getting a sense of the trade-offs when claiming Social Security, according to Joe Elsasser, founder and president of Covisum.

Because there are thousands of Social Security claiming rules, a more in-depth analysis can help identify the best way to get the most from the program for your unique situation.

68% of recently retired workers would consider returning to work, CNBC survey finds
68% of recently retired workers would consider returning to work, CNBC survey finds

For example, married couples really should coordinate their benefit choices, Elsasser emphasized.

"Couples should make the decision together because on the first death the smaller benefit goes away and the larger benefit continues," Elsasser said.

Why it's smart to 'plan under current rules'

It's also important to remember the current depletion date projections are subject to change, as the Social Security trustees amend their projections each year.

Moreover, Congressional legislation could change the program's funding status before that date. That may include higher taxes, benefit cuts or a combination of both. Washington Democrats have put forward proposals that call for raising taxes on the wealthy while making benefits more generous.

For his part, Elsasser doesn't necessarily tell his clients to plan for a benefit cut, but it is important to gauge their potential impact.

"We advise them to plan under current rules, because in the past, there's always been a compromise," he said. "But then stress test the plan and say, 'Are we OK if we do get a benefit cut? And if we do, what is our plan?'"

If the outcome is unacceptable, then it may be time to make changes like reducing spending, saving more or working longer to make sure you can weather those possible cuts, Elsasser said.