Unless you've been living in the middle of nowhere, you're probably aware that the United States' federal deficit is quite large, to say the least. The number is so big, in fact, that it's hard to wrap your head around. Once you begin talking about trillions, it almost sounds as if it's made up.
Unfortunately, the situation is quite real. What is also real is the attempt by lawmakers to shrink this number, and the proposals made to go about it. Some of these proposals could affect your retirement. More specifically, a few of them are targeting Social Security payments, both for people who are already retired and those who are approaching retirement. Below, we will look at the proposals that have been made.
The Ironic Cuts
Despite the fact that Social Security payments are low for a great number of people, many retirees rely on the money they receive in order to make ends meet. If their benefits were lowered, they could be financially ruined. The irony here is that a big reason why cuts are being proposed is to to make up for the damage done to the deficit during the housing market crash. But what some people don't even consider is the fact that this housing market crash harmed the same retirees that would be affected by such cuts. For them, it's a double whammy.
Proposal #1: Raise The Retirement Age to 70.
Currently, the normal retirement age stands at 66. Beginning in 2017 and ending in 2022, there will be a two month increase to this age each year. At that time, the normal retirement age will be 67. This new proposal, however, would alter this quite a bit. If successful, the increase would begin in 2013 and end in 2036, at which point the normal retirement age would reach 70.
Impact: The current rules for collecting Social Security state that each month that a person retires early, he or she will receive a cut in benefits. Since you are permitted to retire as soon as you reach 62, this new normal retirement age would increase the number of months that you could retire early, thus increasing your reduction.
Proposal #2: Base The Social Security Formula on progressive price indexation (PPI).
By basing the Social Security formula on progressive price indexation, those who have annual earnings less than $22,300 would see a rise in benefits. This increase would be equal to inflation for those who earn the maximum amount of $106,800.
Impact: The problem with this proposal is that it damages too many people. While its design would help to lower the federal deficit and benefit the lower half of earners, middle-income workers would be negatively affected. And since there are a great number of middle-income workers, this impact could be huge.
Proposal #3: 1% reduction in the cost of living adjustment (COLA).
This proposal isn't anything new. It has been introduced in the past. The reason it has never lost popularity is because many people claim that the consumer price index (CPI) used in this calculation does not accurately provide the needed cost of living adjustment.
Impact: This proposal stands out from the rest because of the group that would be affected. Rather than impacting those who were approaching retirement like the other two proposals, this would affect those who are already retired. Another consideration is the fact that the older a retiree is, the greater he or she would be affected.
Source: http://firstsecurityfinancialshow.com/blog/bid/179278/The-Impact-of-Social-Security-Cuts
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