We know all too many Americans are overly dependent on Social Security in retirement because they haven’t saved enough in personal retirement accounts. We also know the country’s largest entitlement program continues to stand on shaky financial ground that will eventually collapse absent significant reform efforts from lawmakers on Capitol Hill.
As long as those lawmakers remain content to kick the proverbial can down the road, the multiple factors chipping away at Social Security’s long-term solvency figure to accelerate the deterioration.
Here’s a look at the biggest Social Security-related worries keeping Americans up at night as we head toward 2022.
The program running out of money
We hear it all the time: One of Americans’ biggest financial fears is Social Security running out of money and cutting benefits. Indeed, one of the most recent examples finds 43% of Americans in a recent MagnifyMoney survey fear their retirement dreams could be derailed due to Social Security running dry.
That’s almost twice as many (22%) that are afraid they’ll lose their retirement savings in a stock market crash. Only fear of an unexpected health issue upending their retirement (46%) trumped Americans’ fear of Social Security running dry.
Meanwhile, a Nationwide Retirement Institute survey earlier this year found that 71% of Americans are worried that Social Security will run out in their lifetimes, and 47% of Millennials believe they will not get a dime of the Social Security benefits they have earned.
Given the actuarial state of the Social Security Trust Funds, those fears may not be unfounded.
The Treasury Department’s “2021 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” released at the end of August, found the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2033, one year earlier than reported last year.
At that time, the fund’s reserves will become depleted and continuing tax income will be sufficient to pay only 76% of scheduled benefits.
Within the past two years, Social Security has started to draw down its assets in order to pay retirees all benefits promised. Those monthly payments to beneficiaries now exceed what Social Security payroll taxes and the interest on the trust funds are bringing in, leaving the program to consistently operate in the red.
It’s no big mystery as to why. The number of older Americans receiving benefits is climbing while the number of workers paying into the system is declining—and figures to stay that way for a long time to come. U.S. birth rates are currently at an all-time low, and about half of what it was in the early 1960s.
Raising payroll taxes alone is not a realistic fix, so the age to receive full retirement benefits either has to further increase and/or benefit amounts will have to decrease.
The average senior on Social Security in 2021 collects $1,543 a month. Cutting that sum by 24% brings the average monthly benefit down to just $1,173, which amounts to $14,072 a year.
The Nationwide survey found six in 10 Americans are more pessimistic now about the program running out of funding following the onset of the COVID-19 pandemic. Further, 19% say the pandemic has prompted them to reconsider their plans for claiming benefits, with 11% planning to delay filing and 9% planning to claim earlier.
• SEE ALSO: Social Security Trust Funds Lose Another Year of Solvency
• NEXT: Not Keeping Up with Inflation
Social Security Not Keeping Up with Inflation
Approximately 70 million Americans will see a 5.9% increase in their Social Security benefits and Supplemental Security Income (SSI) payments starting in January 2022—that’s the biggest annual cost of living adjustment in 40 years, and more than four times the 2021 COLA increase of 1.3%.
The 2022 COLA will increase an average monthly retirement benefit of $1,565 to roughly $1,657, an increase of $92. The average retired couple’s collective payment of $2,599 per month will increase to $2,753, an extra $154 monthly for two people.
While high inflation is obviously behind next year’s big increase, over the past 12 years, Social Security COLAs have averaged a meager 1.4%.
The purpose of the COLA is to ensure that the purchasing power of Social Security benefits are not eroded by inflation—but this goal has historically not been achieved, and this year’s rampant inflation certainly isn’t helping.
“Over the past 21 years, COLAs have raised Social Security benefits by 55% but housing category costs rose nearly 118% and healthcare costs rose 145% over the same period,” says Mary Johnson, Social Security and Medicare policy analyst for The Senior Citizens League.
“According to consumer price data through July of 2021, Social Security benefits have lost nearly one-third of their buying power, 32%, since 2000, about the length of a typical retirement,” Johnson says.
Consumer Price Index data for October showed the cost of consumer goods climbed a record 6.2% from one year ago, which is the biggest increase since 1990. Suddenly a 5.9% COLA doesn’t look so helpful.
A larger-than-anticipated hike in 2022 Medicare Part B premiums is also troublesome. Part B premiums for 2022 jump by a record 14.5% from this year. The standard Medicare Part B premium will increase to $170.10 for single individuals with up to $91,000 in income and married couples with up to $182,000, which is $21.60 higher than the 2021 base premium.
From 2000 to 2020, Social Security benefits had an average annual increase of 2.2%, while Medicare Part B premiums went up by 5.9%.
A special rule called the “hold harmless provision” protects Social Security benefit payments from decreasing due to an increase in the Medicare Part B premium.
Most people with Medicare will pay the new premium amount because the increase in their Social Security benefit amount will cover the increase. However, a small number of people will see little or no increase in their Part B premium—and their Social Security benefit checks will remain the same—because the amount of their cost-of-living adjustment isn’t large enough to cover the increase.
• SEE ALSO: It’s Official: 2022 Social Security COLA is Highest in 40 Years
• NEXT: Claiming Strategy Confusion
Claiming Strategy Confusion
Confusion abounds for many Americans about how to optimize Social Security income in retirement by starting to claim benefits at the best age for their situation.
The age at which you can claim full retirement benefits is increasing to 67 in 2022, applying to anyone born in 1960 or later. Someone turning 62 in 2022 is subject to a full retirement age of 67, which is only months higher than those born between 1955 and 1959.
Americans can file for benefits as early as age 62, or can delay filing until age 70 (while you can technically claim benefits after age 70, there is no financial incentive to do so).
If you delay collecting Social Security past your full retirement age (FRA), then you can collect more than your full, or normal, payout. In fact, if you put off claiming until age 70, then you will receive an annual payout up to 32% higher than if you started receiving benefits at full retirement.
But people who start claiming Social Security before reaching full retirement age do so at the cost of a permanently reduced payout. Beneficiaries who start claiming at age 62 will get 30% smaller monthly payments than if they waited until their full retirement age of 67. Those who delay claiming Social Security past full retirement age accrue delayed retirement credits that will increase their monthly payments by 8% for each year of delay up until age 70.
The most effective Social Security claiming strategy for anyone depends on how long they will live. Of course we never know just how long we will live, but for people with a known major health problem, it can make sense to claim benefits as soon as possible (unless they want to leave a higher benefit to a surviving spouse). Healthy people with parents who lived into their 90s might be better suited by delaying claiming benefits in order to receive a higher Social Security payment in their 70s, 80s and beyond.
Also impacting claiming strategies are periods of economic uncertainty or financial need and beliefs that the program might not be around to pay full benefits by the time you are eligible to receive them.
The 2021 Social Security Confidence Survey from Atlanta-based retirement insurance company PlanGap showed that more than 70% of respondents had “a lot” or “a great deal” of concern that they would not receive their full Social Security benefits during retirement.
According to a recent GOBankingRates survey, Gen Z certainly isn’t counting on it being a significant contributor to their retirement income. Gen Z respondents only expect 7% of their retirement income to come from Social Security, while other generations believe Social Security will make up 17% of their retirement income.
Half of retired married couples and about 70% of retired singles rely on Social Security for at least half of their income. A 2017 Social Security Administration study found about one-fifth (19.6%) of Americans 65 and over received at least 90% of their total incomes from Social Security. The program was originally created with the intention of replacing 40% of pre-retirement income.
• SEE ALSO: Social Security Confidence Survey Shows Retiree Doubt
• NEXT: Longer Retirements, More Beneficiaries, Not Enough Workers
More Beneficiaries, Longer Retirements, Not Enough Workers
Demographic challenges now and well into the future create virtual mathematic certainties that Social Security will collapse absent significant changes.
While life expectancy for Americans has increased significantly over the past several decades, that added longevity creates heightened challenges for Social Security. In 2020, life expectancy at birth for the total U.S. population was 77.3 years (actually declining by 1.5 years from 78.8 in 2019 thanks to the COVID-19 pandemic), and hit its lowest level since 2003. For decades, U.S. life expectancy was on the upswing. But due in part to the opioid crisis, that trend stalled in 2015 for several years before rising again in 2019.
Longer lifespans mean longer retirements. Americans who retire at 65 have a 76% chance of having at least 10 years of retirement and a 38% chance of having 20 years of retirement.
Longer retirements mean higher total payouts—at least unless payouts get cut back either by Congress or by the program’s eventual lack of funds.
The U.S. is in the midst of a huge increase in the number of Social Security beneficiaries as a result of Baby Boomer retirements, with roughly 10,000 Boomers hitting age 65 every day from 2011 until 2030, when the youngest of the estimated 73 million Boomers hit that threshold.
In 1940, the life expectancy of a 65-year-old was almost 14 years; today it is just over 20 years. The number of Americans 65 and older will increase from about 57 million in 2021 to about 76 million by 2035.
Think that puts a little stress on the program? To add to it, there aren’t nearly enough workers paying into the program today and for the foreseeable future.
The worker-to-beneficiary ratio has fallen from 5.1 workers for every beneficiary in 1960 to just 2.7 in 2021, and is estimated to fall to 2.3 in 2033. Under currently scheduled tax rates and benefits, the system needs a worker-to-beneficiary ratio of about 2.8 to function at a pay-as-you-go level.
• SEE ALSO: A 65-Year Retirement? New Research Finds Humans Could Live to 130
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