Social Security Benefits To Get Biggest Increase in 40 Years
In October, the Social Security Administration announced that the nearly 70 million Americans collecting benefits will get a 5.9% bump in 2022, the highest inflation adjustment in 40 years. This will be the highest cost of living adjustment that nearly every recipient has ever seen. The increase will be effective starting in January and will increase the average monthly benefit by approximately $95/month. While this increase is welcome, the fact of the matter is that historically, these Cost of Living Adjustments (COLAs) have not kept pace with some of the fastest growing costs of older households such as housing and healthcare.
Nearly every time we talk about Social Security, we are asked about its long-term solvency. Will Social Security go bust? Will it be there when I am ready to retire? Back in late August, the Social Security and Medicare Trustees released their annual report on the long-term financial state of the programs. The report said that the Social Security Trust Fund is expected to be depleted in 2033, one year earlier than previous projections. The projected date of depletion has been in the 2035 range for the past decade, so this adjustment is nothing new. The immediate cause of the reduced timeline is of course related to the slowdown in economic activity due to the pandemic.
The Social Security Trust Fund collects payments out of the wages of millions of American workers and when those workers are laid off or otherwise unable to collect paychecks, the trust fund is unable to collect its share of those paychecks. In its annual report, the Social Security Administration (SSA) projects that employment and wages will gradually rise to full recovery by 2023, but that the level of worker productivity and Gross Domestic Product (GDP) will be permanently lowered by 1%. That permanent decline is not a consensus view from economists and should be viewed with caution. In addition, the report estimates that there will be a higher mortality rate for people aged 15 and older through 2023. Meaning once again, fewer workers collecting paychecks. But the COVID-19 mortality rates are much lower for working individuals and much higher for those actually collecting Social Security benefits. There is also no provision in the report accounting for the death of more than 200,000 Americans who were collecting Social Security checks.
The report also notes that the trust fund’s reserves of $2.9 trillion were actually $11 billion higher this year than they had been the previous year and that the pool that pays out retirement income increased by $7.4 billion. Data shows that the Old-Age & Survivors Insurance Trust Fund pool took in $968.3 billion and paid out just $961 billion in 2020. The gloomy projection reported in the press is based on “less revenue anticipated in the near term,” which implies permanently lower economic activity and the death of many more workers due to COVID-19. Most people, including reporters, don’t understand how the trust fund actually works. The Social Security system collects its revenues from worker paychecks (and employer matches) and then turns around and pays that money out to Social Security beneficiaries. Again, the trust fund currently has $2.9 trillion in assets and much of it is in government securities. That pool of money pays out any annual shortfall between the amounts collected and the benefits paid. The fact that the fund increased suggests that it didn’t have to reach into its pocket at all over the past 12 months.
If the trust fund does run out of money, the SSA would simply pay out the monies collected without a supplement and if nothing is done by 2033, that is projected to be 78% of the benefits paid out today (remembering that it was enough to pay out 100% in the past year). The important thing to note is that 78% is not 0%. It’s more than three-quarters of the expected benefits. Again, this is based on a lot of (possibly faulty) assumptions, including the idea that few Americans will continue working after they receive their benefits, that the economy will never fully recover from COVID-19 and that pandemic mortality will be evenly distributed between the young and the old.
Lastly, does anybody really think that Congress would allow the cohort of voters currently receiving Social Security benefits to take a sudden 22% haircut in that portion of their retirement income? I have always thought this was the piece missed in the analysis. People on Social Security vote and politicians will be HIGHLY motivated to solve the problem when voters are counting on it!
Bottom Line: Expect some age and benefit tweaks (which are probably needed) and some higher payroll taxes long before you see any reductions in Social Security benefits. We believe more changes are coming.