Social Security's funding hole could cost retiring couples nearly $1M in benefits

Future retirees could lose hundreds of thousands in benefits, with nearly a million dollars in lifetime losses for married couples in mass affluent households, unless stakeholders take action to address the shortfall in Social Security funding.

That's according to a new white paper from HealthView Services titled "Funding Social Security: Ranking the Cost of Proposed Changes on Americans Planning for Retirement," which outlines potential losses for Americans who are either 10 or 25 years away from retirement, depending on their income level.

According to the analysis, the most devastating impact under a no-action scenario would lead to a 21 percent reduction in Social Security benefits. In that case, HealthView projects that a mass affluent couple, earning a combined $175,000 and 25 years from retirement, could lose $908,000 in lifetime benefits. In contrast, an average income couple earning $110,000 and retiring in 10 years could see a reduction of $252,000.

“This paper provides working Americans, advisors and the financial community cost projection data to understand the ways in which changes to Social Security will affect retirement plans,” Ron Mastrogiovanni, CEO of HealthView Services said in a statement. “Congress will have to make hard choices that will reduce benefits or increase tax revenue for the program – both of which have a significant cost to future retirees.”

One change the report puts forward involves raising the full retirement age from 67 to 68. According to the report, this shift in the FRA would soften the long-term impact for mass affluent couples with a 25-years retirement timeline, who'd see a potential reduction of $325,000 in lifetime benefits. For an average income couple 10 years from retirement, the financial hit would be less severe but still significant, potentially adding up to $249,000 over time.

Another proposal would reduce the annual cost-of-living adjustment – which is already expected to slow down amid the recent cooling of inflation – by 0.5 percent each year through retirement. For a mass affluent couple 25 years away from retiring, that lower-COLA scenario would mean a reduction of $287,000 in benefits over their lifetime. In contrast, an average income couple retiring in 10 years would see projected losses of just under $100,000.

The report also explores tax-based reforms, such as raising employee and employer payroll taxes or eliminating the cap on taxable earnings for high-income individuals.

Under the former option – a hypothetical hike on FICA tax from 6.2 percent to 8 percent – the Social Security funding shortfall would be wiped out, though it would cost working Americans anywhere from $133,000 in lost net income for mass affluent couples over a 25-year period, to $22,000 for an average income couple leaving the workforce in 10 years.

Meanwhile, shifting the burden solely on high-income Americans – HealthView Services' analysis assumed couples earning $500,000 yearly and 25 years from retirement would pay a little more than half of that, $252,000, into the system while receiving no additional benefits – would fill 70 percent of the hole in Social Security funding.

“The cost for individuals of addressing Social Security's funding needs will vary considerably based on which proposals are implemented and when they are put into place, but also by income, longevity and claiming age,” Mastrogiovanni said.