Social Security is the bedrock of the American retirement system, but it’s currently being assaulted on all sides. Social Security is based on the principle that payroll taxes on current workers can pay the benefits of those who have retired. However, with so many Americans living longer, more and more money is required to pay the benefits of retired Americans. This has been a growing problem for years. But now, two new problems are further straining the system. The first is the massive inflation adjustment for 2022 payouts. The second is the coronavirus pandemic. Here’s a look at how these two new issues might be further depleting the Social Security Trust Fund.
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2022 Social Security Increase
The Social Security Administration announced that in 2022, retirement payouts would jump by a staggering 5.9%. That’s the largest inflation adjustment in 40 years. The annual inflation adjustment is meant to help retirees keep up with the cost of living, which jumped astronomically in 2021. However, this massive increase in payouts further depletes the Social Security Trust Fund, which was already slated to run out in 2033. According to the Committee for a Responsible Federal Budget, this date may now move up to 2032.
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What Does Social Security Depletion Mean?
In one sense, the ominous term “Social Security depletion” isn’t quite as menacing as it sounds. Social Security payments are made from two sources: the Social Security Trust Fund, and more importantly, the payroll taxes collected from current workers. Estimates are that the Social Security Trust Fund may run out in 2033 — or perhaps 2032, thanks to the inflation adjustment for 2022. However, workers will still continue paying into the system. This means that benefits can be maintained, albeit at about 76% of current levels. So, if the inflation adjustment accelerates the depletion of the Social Security Trust Fund by one year, that just means benefits may have to be cut one year earlier, not that the whole system will go bankrupt. This also gives Congress about an 11-year runway to work out a solution to maintain benefits at current levels.
The Double-Edged Sword of the Social Security Increase
The Social Security Trust Fund is invested entirely in U.S. Treasury securities. With even the 30-year U.S. Treasury paying a scant 1.814% as of Dec. 19, there’s no way the Trust Fund can generate enough income to offset the 5.9% inflation adjustment of 2022. Inflation is anticipated to moderate into 2023, but even still, the Social Security Trust Fund is fighting a losing battle whenever there’s a significant inflation adjustment.
Of course, the other side of the enhanced payout is that American retirees can finally start catching up with the cost of their bills. Over the past decade, the average inflation adjustment was just 1.65%, and in three of the past 12 years, there has been no increase whatsoever. Thus, while the 5.9% increase for 2022 may cause longer-term problems with the solvency of the Trust Fund, for now, retirees are finally getting the increase they need to keep up with rising costs.
As if the Social Security retirement program wasn’t already facing difficulties, the powerful impact of the coronavirus pandemic has dealt it another blow. Since the bulk of Social Security retirement payments come from payroll taxes on current workers, any depletion of the workforce can create problems. The long-lasting coronavirus pandemic has taken a big bite out of current contributions to Social Security, as employees couldn’t even report to work during the early phases of the pandemic, and many have yet to return to the workforce. According to the Bipartisan Policy Center, the economic effects of the coronavirus pandemic have accelerated the depletion of the Social Security Trust Fund by at least one year. In its worst-case scenario, the BPC indicated that funds may run out as soon as 2029.
The Bottom Line
Social Security has long been under the financial pressure of a decreasing workforce and an aging population of retirees. The 2022 Social Security payout increase and the coronavirus pandemic have only added to those financial stresses. But we are still likely at least a decade away before Social Security becomes a real problem, and Congress is well aware of the hard choices it will need to make before that day arrives. For now, the 2022 inflation adjustment will provide retirees with some level of relief from the rising costs of goods and services.
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This article originally appeared on GOBankingRates.com: Social Security Increase: Will It Speed Up SSA Depletion?