If you’re currently receiving Social Security retirement benefits, or are about to, you may have recently seen both good news and concerning news about the program.
Beneficiaries could see a boost of about 6% in 2022
First, the good news. Social Security payments are likely to see a bump of approximately 6% in 2022 to address higher living expenses due to inflation. The annual Cost-of-Living Adjustment (COLA) is based on inflation during the third quarter of the preceding year. A hike of 6% would be the largest increase for beneficiaries since 1985.
There could be reduced benefits in just over a decade
Separately, there’s the concerning news. In late August 2021, the Social Security and Medicare Trustees issued their annual report on the funding status of the program’s trust funds. It showed the Social Security trust fund for Old-Age and Survivors Insurance (OASI) would become depleted by 2033, a year earlier than previously projected.
When the trust fund reserves are depleted — technically referred to as insolvency — benefits are still paid, but at a reduced rate.
Under current law, when the trust fund is depleted, payments to beneficiaries must equal incoming revenue via payroll taxes and other sources. The trust fund actuaries estimate that at some point in 2033, a depletion of fund reserves would require all payments to be automatically reduced to 76% of their scheduled value — in other words, a 24% cut to all Social Security retirement benefit payments1.
Adjustments to Social Security in the past and potential adjustments for the future
We believe there is ample time and there are options to adjust the program to maintain scheduled benefits in full. Some options, however, would require higher taxes dedicated to the program, and the sooner elected officials make such a change, the easier the adjustment should be. Social Security reform may be a hot-button issue, but it is consistently noted as one of the most favored of government programs, thus, there is motivation for elected officials to act.
Social Security has undergone a number of adjustments since its inception in 1935. The changes made via the Social Security Trust Fund Amendments of 1983 were likely the most notable. These included slowly raising the full retirement age from 65 to 67, raising the dedicated tax rates that employee and employers pay (as well as rates for the self-employed) and other tweaks.
Because of the 1983 adjustments, Social Security retirement program benefit payments did not exceed the revenues from payroll taxes until 2010, according to the trustees. We believe this demonstrates the power that manageable actuarial adjustments can have over these huge programs.
Importantly, the adjustments made in 1983 did not affect those receiving Social Security benefits at the time, nor those about to receive benefits in the near term. The excess payroll taxes generated by the changes accumulated in the Trust Fund until 2010, but then began declining.
Although it’s not intended to be the sole source of income for many individuals, Social Security is an important consideration in retirement planning. We believe reform is most likely to take place before benefit cuts are necessary.
We also recognize the value of preparing for uncertainty. In the 2021 Ameriprise Financial study, Financial Priorities, 62% of respondents said that financially preparing for uncertainty is more important now compared to before the pandemic.2 If you have concerns about your overall retirement income, including Social Security, talk with your Ameriprise financial advisor about ways to offset the potential risk of reduced program payments.