Many baby boomers discover that their financial future is a little more hazy than they had anticipated as they get closer to retirement. The Social Security systems have been the subject of cuts and closures by Congress for several years, affecting services and benefits that a large number of baby boomers depend on.
Uncertainty Of Social Security Benefits
Perhaps now more than ever, with the uncertainty surrounding Social Security’s future, it is imperative to familiarize yourself with these planned changes and make appropriate plans. It’s not that Social Security is having financial difficulties. Within the next ten years, Social Security will run out of the trust funds from which it has been drawing. This implies that Social Security will run out of funds before it can fully compensate pensioners. A few suggested fixes for the issue are now being discussed. Raising the full age of retirement or decreasing Social Security benefits are two examples of this.
Raising Full Retirement Age
Most baby boomers won’t be impacted by raising the full retirement age, but since they are already in or close to retirement, they may be impacted by benefit reductions. As of right now, cuts or modifications to Social Security are merely suggestions because nothing has been decided. It’s not a cut, but the COLA affects how much Social Security recipients are paid. Social Security bases its annual benefit increase (COLA) on rising living expenses as determined by the Consumer Price Index. In 2024, the COLA will be 3.2%. With a COLA of 8.7% in 2022, it was the highest increase since 1981.
Social Security COLA Based On Last Year’s Inflation
The third quarter of the previous year’s inflation (July, August, and September) serves as the basis for the COLA. According to this year’s estimations, the Federal Reserve’s rate changes caused inflation to decrease by the third quarter after it had increased during the first two. But, it’s possible that some individuals racked up debt during those times of high inflation. Retirees may find it more difficult to pay off the debt they accumulated during those periods if there is a lesser COLA rise. The 3.2% rise might not be sufficient to keep up with inflation in the current quarter or the upcoming ones.
Determining Social Security Benefits
Employer-sponsored defined benefit plans often only take into account a few years’ worth of your income. Some will base your benefit on the latest few years of compensation, while others will use the highest few years of the revenue history. However, Social Security evaluates your whole earnings history, adjusted for inflation, and the 35 highest years to determine your benefit. Knowing this can be especially helpful if you’ve been employed for 35 years yet had some relatively low-paying years throughout that time. Additionally, the calculation used to determine your lifetime average will include zeros if you have worked for fewer than 35 years.