Social Security Announces Big Raise for Beneficiaries in 2022—Is the System Headed for Insolvency?

In October of this year, it was announced that Social Security benefit payments would see a 5.9% increase in 2022, after a year of higher-than-expected inflation. This is the largest cost-of-living adjustment (COLA) in almost 40 years!

Seeing a sizeable increase in Social Security payments should be good news for recipients considering that the Annual 2021 Trustees Report showed that both Social Security and Medicare face long-term financing shortfalls under current projections. Both programs project that cost growth will exceed economic growth through the mid-2030s. Additionally, Social Security and Medicare have been significantly affected by the pandemic and 2020 recession. According to current projections:

  • The Social Security Trust Fund should be able to pay scheduled benefits until 2033, at which point reserves will become depleted and new income will only be sufficient to support payment of about 76% of scheduled benefits.
  • The Supplemental Medical Insurance Trust Fund (which pays Medicare Part B & D) continues to show adequate financing for the indefinite future due to an ability to access financing from general revenues and an increase in beneficiary premiums.

Something needs to change to shore up Social Security’s finances

To summarize the key points from the report, something will have to change in the Social Security Administration prior to 2033 to keep the current level of benefits in place . Additionally, we should expect continued premium increases (above GDP growth rate) for Medicare.

Before we sound the alarm and start reducing expectations for future social security benefits, keep in mind the options that might be available to help solve the projected shortfall:

  • As you may remember, legislation from 1983 first modified the Social Security program to begin pushing the full retirement age (FRA) from age 65 to 67. It would not be hard to imagine future changes to continue raising the age for benefit eligibility.
  • Recently, the Biden administration suggested a measure to begin assessing Social Security tax on individuals earning over $400,000 (currently social security tax stops being collected above $142,800 of earnings). This proposal estimates that it would increase Social Security revenue by $740 billion over 10 years.
  • Additionally, each year the wage base (amount of earnings subject to Social Security/payroll tax) increases. Historically, this change averages out to be about a 3.2% increase each year. Accelerating the amount employees need to pay into the system to maintain solvency also seems like a viable solution.

We do not see a steep reduction in benefits as the most likely outcome, but we do expect increased contributions along with raising the full retirement age to as high as 70 years old to receive full benefits.

Determining how social security fits into your plan and when to file for benefits are important topics to discuss with your financial advisor.

 

Sources: www.ssa.gov/oact/cola/colaseries.html, en.wikipedia.org/wiki/Social_Security_Wage_Base

Disclaimer: The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

The Author: Ian Castille, CFP®

Ian is a Principal and Senior Financial Advisor at Capital Advantage, as well as a CERTIFIED FINANCIAL PLANNER™ (CFP®) and an Investment Advisor Representative. He is part of the investment committee, and is responsible for developing and maintaining client relationships, designing financial plans, and managing investment portfolios. Ian specializes in helping his clients navigate the financial transition to retirement. His work includes personalized strategies to reduce taxes, make smarter investment decisions, and optimize income streams. As an advisor, Ian believes his job is to bring peace of mind by providing financial clarity for his clients.

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