The annual Social Security Trustees Report is out. At 275 pages I wouldn’t expect any of you to want to read it! I haven’t read it all, but I will share some highlights (I know where to look).
The report really used to be one of those government reports that nobody paid much attention to, including its intended recipients: Congress. Now, the release of the report normally makes the nightly news, and everyone has a different take on it.
The purpose of the report is to communicate to Congress the financial condition of the Social Security system over the next 75 years. If the system is in balance—that is, able to pay promised benefits over the entire projected time period—no action is required. BUT, if the system is projected to run short, the Trustees call upon Congress to fix it.
Here’s a few nuggets I’ve found and updates on each:
- Future Social Security Shortfalls
- Future Possible Trust Fund Exhaustion
- Current Year Improvements
- What About Inflation Being Much Higher?
- Will Social Security Be There For Me?
Future Social Security Shortfalls. Suggest fixes; 1) raising revenues (this year they call for an increase in the payroll tax rate to 15.64%, from 12.4%, starting in January 2022); 2) cutting benefits (by 20.3% for all beneficiaries or 24.1% for those becoming eligible for benefits starting in January of 2022); or enact some combination of revenue-raising and cost-cutting measures designed to bring the system into balance. (These however are blunt fixes, not necessarily meant to be enacted but designed to illustrate the math problem that needs to be solved.)
Future Possible Trust Fund Exhaustion. Under the Trustees’ current projections, the combined OASDI Trust Fund will exhaust in 2035, after which payroll tax revenues will be sufficient to pay 80% of promised benefits. But if Congress waits until 2035 to enact changes, the payroll tax rate would have to rise to 16.47% or benefits would have to be cut by 24.9%. The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them. They say that implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits.
Current Year Improvements. This year’s report shows a slight improvement over last year’s, primarily due to the lessened impact of the short, Covid-caused recession in 2020, it’s understandable why Congress is not rushing to act. In fact, the one major bill proposed by Democrats would increase benefits without really addressing solvency, while Republicans are completely silent on the issue. The kind of Social Security reform that’s needed would necessarily leave certain constituents worse off, so it’s understandable why no politician is willing to take it on.
What About Inflation Being Much Higher? The report states that the trustee’s intermediate assumptions are assuming an inflation rate of 4.54% for 2022, 2.33% for 2023, and 2.4% for 2024 and thereafter. I still continue to use ~2.0% in our projections for our clients.
Will Social Security Be There For Me? Naturally this is everyone’s biggest question. The report doesn’t come to that type of conclusion. Here are my suggestions:
- Don’t let solvency issues determine when you claim. If use a potential 20% benefit cut as an excuse to claim early, you’re focusing on the wrong part of the equation—the part that’s being taken away rather than the part you’re left with. Eighty percent of a higher benefit claimed at 70 is more than 80% of a lower benefit claimed at 62. If you really think benefits will be cut, you should try to maximize your benefit so you’ll have more left after the cut.
- Have confidence that Congress will act—while also understanding it may not. In political years, the time between now and projected insolvency is enormous. The 13 years between now and 2035 represents six Congressional terms and two Senate terms. There will likely be completely different people in power then. If they swoop in and “save” Social Security, like Congress did in 1983 when the trust fund nearly ran out, they’ll be seen as heroes. So, it’s highly likely that Congress will reform the system before benefit cuts become necessary. Then again, we can never know for sure if Congress will act, so we need to understand there’s a slim chance that it won’t.
- Lessen your dependence on Social Security. If you really think benefits will be cut—or fear Social Security will go away entirely (a common thought among younger generations)—work on beefing up your own retirement resources. Work longer, earn more, save more, and invest wisely. We should build your best strategy now.
- Have flexible expectations. Our reports and projections are meant to guide your decisions on when to claim and the determine the best and most efficient tax strategies in building your future retirement income strategy. They are estimates only and are not intended to be exact. It’s important to coordinate the timing of your Social Security Benefits with all other income sources you may have.
As we all know it hasn’t been a pretty Social Security picture for years. The good news is our retirees continue to get their checks… and the bad news is Congress seems to delay doing anything causing unnecessary confusion and uncertainty about the future.
Call or email me. If we haven’t produced your Social Security report or you feel it’s time for an update let’s find your best strategy!
