Some Retirees Could Lose Part of Their Social Security Check Under This Proposal

Social Security is one of the most important benefits for seniors today. Many retirees would struggle to cover their living costs without those monthly checks.

The average retirement benefit paid by Social Security today is $2,086 per month. But some Social Security recipients collect much larger benefits. In fact, the program's maximum monthly benefit today is $5,181, which amounts to more than $62,000 per year. As such, some married couples may be eligible for well over $100,000 a year in Social Security benefits if both qualify for the maximum monthly check.

A new proposal seeks to cap Social Security benefits for higher earners, and while there's a good reason for it, it's a change that's apt to be met with resistance.

How Social Security benefits are calculated

The reason some people get smaller Social Security benefits while others get larger checks boils down to the program's benefits formula. Social Security benefits are based on workers' highest-paid 35 years of earnings. For this reason, people with lower career earnings tend to get smaller benefits, and consistently high earners get larger checks in retirement for having paid more into the program.

Filing age also plays a role in how benefits are determined. Claiming Social Security at full retirement age, which is 67 for those born in 1960 or later, avoids a reduction in benefits. Filing earlier, which is allowed starting at age 62, reduces those benefits permanently.

On the other hand, delaying Social Security past full retirement age results in boosted benefits. Seniors who are eligible for Social Security's maximum benefit today earn it not just by having high earnings, but by waiting until age 70 to file.

Age 70 is when seniors stop getting credit for a delayed claim. For this reason, it's considered the latest age to file, even though it's possible to sign up at 71 and beyond.

Why Social Security needs a financial lifeline

Social Security primarily relies on payroll tax revenue to pay benefits. But in the coming years, the number of workforce participants relative to beneficiaries is expected to shrink, causing the program to have a shortfall.

Once Social Security's trust fund runs dry, which is expected to happen in late 2032, the program might have to implement a broad 22% benefit cut. Social Security needs more revenue to avoid that.

What the Six Figure Limit proposal seeks to do

Allowing Social Security to cut benefits could plunge many older Americans into poverty, so lawmakers are invested in finding ways to prevent that from happening. One proposal is to limit benefits for higher earners.

Dubbed the Six Figure Limit, the proposal seeks to limit Social Security benefits to $100,000 a year for married couples filing at full retirement age and $50,000 a year for singles doing the same. This change could close one-fifth of Social Security's funding gap, proponents say. And while it would clearly take some benefits away from wealthier retirees, it could ultimately help preserve benefits for seniors who need Social Security the most.

Why the proposal may not fly

Reducing benefits for higher earners might seem like a reasonable way to address Social Security's funding shortfall. After all, people who are eligible for more than $100,000 a year in Social Security as married couples or $50,000 as singles are high career earners by nature.

People in that situation conceivably had the means to save for retirement. So cutting their Social Security may not upend their financial plans as badly as cuts for less wealthy retirees.

The problem is that this proposal changes the nature of Social Security. Social Security is not supposed to be a welfare program reserved for the poor. All workers who pay into the system are supposed to get something out of it.

There may be strong pushback to a solution that penalizes people who worked hard and boosted their skills to earn a lot of money. It also takes benefits away from people who paid more Social Security taxes in their lifetime.

Finally, even those supporting the solution agree it only closes a limited portion of Social Security's funding gap. So it may not end up being as useful as other proposals.

Bottom line

A good number of seniors today are living on just Social Security. For people in that situation, benefit cuts could be catastrophic. So it's easy to see why lawmakers are getting increasingly desperate to find a way to shore up Social Security's finances.

While limiting benefits for higher earners is one potential solution, there are other fixes Congress can look at to prevent Social Security cuts. These options include raising the current Social Security payroll tax rate, increasing or eliminating the wage cap that limits how much earnings are taxed for Social Security purposes each year, and raising Social Security's full retirement age.

While these and other solutions may not be ideal and could certainly come with drawbacks, they don't alter the nature of Social Security. For this reason, they may be more viable than the Six Figure Limit. But higher earners should still pay attention in case the proposal ends up gaining more traction.

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