SmartMoney Blogs

A blog about living in and planning for retirement

3 Ways Your Social Security Payments Are Already Being Cut


Policy experts have focused on alternative ways of eliminating Social Security’s 75-year financing gap, but lost in the debate is the fact that even under current law Social Security will provide less retirement income relative to previous earnings than it does today.  Combine the already legislated reductions with potential cuts to close the financing gap, and Social Security may no longer be the mainstay of the retirement system for many people.

In 2002, the frequently quoted replacement rate for the “medium earner” who earned about $42,000 in today’s dollars and retired at age 65 was 41%; that is, Social Security benefits were equal to 41% of the individual’s previous earnings.  Under current law, three factors will reduce this replacement rate: 1) the extension of the full retirement age; 2) the increase in Medicare premiums; and 3) the taxation of Social Security benefits.

1. The extension of the full retirement age

Under current law, the full retirement age is scheduled to increase from 65 for those reaching 62 in 2000 to 67 for people reaching age 62 in 2022.  This increase is equivalent to an across-the-board benefit cut.  For those who continue to retire at age 65, this cut takes the form of lower monthly benefits; for those who extend their work lives, it takes the form of fewer years of benefits.  Thus, as reported in the Social Security Trustees Report, the replacement rate for the medium earner will drop from 41% to 36% for people who retire at age 65 in 2030.

2. The increase in Medicare premiums

The rising cost of Medicare will also affect future replacement rates.  For the medium earner, Medicare premiums, which are automatically deducted from Social Security benefits, are scheduled to increase from 5% of benefits for someone retiring in 2002 to 12% for someone retiring in 2030.

3. The taxation of Social Security benefits

The taxation of Social Security benefits The third factor that will reduce Social Security benefits is the extent to which they are taxed under the personal income tax.  Under current law, individuals with less than $25,000 and married couples with less than $32,000 of “combined income” do not have to pay taxes on their Social Security benefits.  (Combined income is adjusted gross income as reported on tax forms in addition to nontaxable interest income and half of your Social Security benefits.)  Above those thresholds, recipients must pay taxes on either 50% or 85% of their benefits.  In 2002, only 20% of people receiving Social Security had to pay taxes on their benefits, so median earners typically did not pay any taxes.  But the thresholds are not indexed for growth in average wages or even for inflation so, by 2030, as real benefits and other income increases, many medium earners will pay tax on half of their benefits.

The bottom line is that the net Social Security replacement rate for the medium earner will decline from 39% in 2002 to 29% in 2030 under current law (see Figure).  Policymakers need to be aware of this fact when they consider how much of the 75–year financing gap should be closed by benefit cuts and how much by tax increases.


We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (5 of 38)

View all Comments »
    • There is an easy fix to Social Security. The Greenspan report on Social Security 1983 recommended a tax on Social Security benefits. Since the report was aimed at improving the soundness of the system, the report implied that the new tax would be placed in the Social Secuity Trust fund. Congress instead placed these taxes in the general fund. Congress, in effect took money intended for the SS fund and placed it in the general fund. Congress should be held accountable and credit the SS fund for all years since the tax was inacted.

    • R they gonna cut disability social security and if so how can they do that for people with Disabilitys that can barley survive on what little they get

    • My opinion is that our so called american government should not get money for what they are doing to all americans

    • To DOUG…..What basket have you been hiding under???? You say, “Give people a chance to be responsible and they will”. That’s pie in the sky talk. You must live in a different society than I do. Yes, ideally, we should all care for each other and every individual… and corporations and CEOs should do their duty to God and country and give to humanity. Please tell me where this is happening???? Most laws now are passed for corporate greed. The poor and the middleclass are suffering. The air, the water, our lands, our food are becoming so polluted and dirty because there is no enforcement of regulations. Our schools, the only bastion of real demcracy, are being taken over by for profit organizations. Honey,I hate to burst your bubble,but people are not generally responsible unless there’s a real good reason. Sad,yes, but true. Face reality and know that you and whoever you must be hanging out with are exceptional and not the usual. We need Social Security and public schools.

    • Its too bad that we are all in this mess. There is no way out other than bite the bullet and all of us will have to get shafted so that SS can survive for future generations. For this and the next few generations, we have to get use to getting by on less.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.