Social Security as you know it now might be changing.
Continue Reading Below
House Ways and Means Social Security Subcommittee Chairman Sam Johnson (R-Tx.) recently introduced legislation he says is a way to "save Social Security for generations to come." Federal actuaries agree that the GOP proposal should make the Social Security trust fund solvent for 75 years. However, this solvency comes at a cost. Here are seven key ways the proposed Social Security changes could impact your pocketbook.
Image source: Getty Images.
1. Gradually increase the retirement age
Currently, Americans must reach the age of 67 to receive full Social Security retirement benefits. The GOP proposal would increase this full retirement age to 69. However, the change wouldn't happen overnight.
Nothing would change for individuals who reach the early retirement age of 62 before 2023. For those who turn 62 in 2023 or after, the full retirement age would increase gradually. Anyone who reaches age 62 in 2030 or afterward wouldn't receive full Social Security retirement benefits until age 69.
Continue Reading Below
2. Change how benefits are calculated
The proposed legislation would change how Social Security benefits are calculated in several ways. Some would receive more benefits as a result of the changes. For example, lower-income workers' benefits would slightly increase. So would those of people who have paid into Social Security for 35 or more years.On the other hand, workers with above-average earnings would see their benefits decrease slightly.These changes would be gradually implemented beginning in 2023.
3. Change how cost-of-living adjustments are calculated
Not every proposed change would be gradual, though. The GOP's legislation would change how cost-of-living adjustments (COLAs) are calculated for all retirees, with the new calculations taking effect in December 2018.
This new calculation would use what's called a chain-weighted consumer price index (CPI). The chain-weighted CPI typically grows more slowly than the traditional CPI used to calculate Social Security COLAs, so the net impact would likely be lower yearly increases. And for retirees with modified adjusted growth incomeover $85,000 for single tax filers and above $170,000 for joint tax filers, there would be no COLAs at all.
4. Eliminate the earnings test
Currently, workers who retire earlier than the normal retirement age receive lower Social Security benefits if their earnings are above a specified amount. This reduction in benefits lasts until the workers reach the full retirement age. With the proposed legislation, this earnings test will go away effective January 2019.
5. Gradually eliminate federal taxes on benefits
Under current law, up to 85% of your Social Security benefits might be subject to federal taxes depending on how much you make. With the proposed GOP changes, the federal taxes on Social Security benefits will be eliminated -- eventually.
The legislation calls for a gradual increase in the amount of earnings exempt from federal taxes beginning in 2045 and extending through 2053. By 2054, federal taxes on Social Security benefits would be completely eliminated.
6. Allow lump-sum payment of delayed retirement credit
Currently, individuals who postpone taking Social Security benefits past the normal retirement age are eligible to receive higher payments when they do begin receiving benefits. The proposed changes would allow these individuals to opt to receive a one-time lump-sum payment instead of receiving the higher payments over time.
7. Cap nonworking spouse benefits
Under current law, it's possible for the nonworking spouse of a high-income retiree to receive more in Social Security benefits than a lower-income person who paid into Social Security his or her entire working life. The GOP's plan proposes to place a cap on the benefits of nonworking spouses.
Will these changes really happen?
Some of the changes to Social Security proposed by Rep. Johnson are highly controversial. Any benefit cuts that negatively impact lower-income or middle-class workers are sure to be fiercely opposed. On the other hand, some of the proposed changes have attracted bipartisan support in the past. For example, President Obama recommended adopting the chain-weighted CPI for COLA calculations in his 2014 budget.
The biggest challenge to the GOP's Social Security plan might come from the GOP White House. President-elect Trump promised to save Social Security without making any cuts. That stance could put him at odds with Republicans in Congress.
Of course, something must be done about Social Security at some point. The combined Social Security trust funds will be depleted by 2034. If nothing is done before then, all benefits will be cut by 21%. Whether the GOP plan or a modified version of it passes, Social Security as you know it will change -- sooner or later.
The $15,834 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.