Rethinking Social Security: The Impact of the 2022 Social Security Trustees’ Report
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The board of trustees of the Social Security trust funds released its 2022 annual report on June 2, detailing the program’s current and projected financial status. The report includes extensive information about the actuarial status and financial operations of the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds. The OASI and DI funds are separate legal entities, but the report presents information that combines their reserves to illustrate the actuarial status of the Social Security program. Note that the assumptions used in the report were made in mid-February 2022, before the Ukraine war.
Highlights of the 2022 Report
The 2022 report reflects the trustees’ best estimates of the effects of the COVID-19 pandemic. The pandemic is projected to have a continuing significant impact on the OASI and DI programs in the near term, but the future course is uncertain. The economic recovery from the brief recession in 2020 has been stronger and faster than assumed in last year’s report. On balance, the projected long-range actuarial status of the OASI and DI trust funds has been little changed by the pandemic and ensuing recession, considering both the effects realized to date and those yet expected.
It is projected that the combined fund will be able to provide benefits in full on a timely basis until 2035, one year later than predicted in 2021’s report. This does not mean that Social Security will go bankrupt, but it does mean a reduction of payments if Congress does not address the situation before 2035. If nothing changes, combined trust fund payments will drop to 80% of scheduled benefits payable at that time.
Specifics from the Report for Each Separate Fund:
- The OASI Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits until 2034 (a year later than 2021’s report). At that time, OASI income would be sufficient to pay 77% of scheduled benefits.
- The DI Trust Fund, which pays disability benefits, is not projected to become depleted during the period of 75 years ending in 2096. This is a significant improvement from last year’s prediction that the fund would be depleted in 2057.
According to Steve Goss, chief actuary of the Social Security Administration, “We’re in a little better shape [than in 2021] because the economy has come roaring back to such a wonderful extent.”
He pointed out that labor demand has had a “remarkable rebound.” Further, the “Great Resignation” has not damaged employment because people typically have left jobs for better, higher-paying jobs.
The insolvency would require a 25% reduction in program costs or a 33% increase in revenues, i.e., taxes.
What Does This Mean for Your Financial Plan?
You may want to stress test your financial plan now. The projections make for grim reading, but lawmakers have it within their power to shore up the program. There are numerous potential fixes, ranging from reducing the annual cost-of-living adjustment (COLA) and increasing the full-retirement age, to eliminating the Social Security wage ceiling and increasing the payroll tax. If lawmakers choose to raise payroll taxes to produce enough revenue to pay full benefits, they would have to boost the 6.2% currently coming out of employee paychecks to 7.82%. Employers would also be on the hook for an identical increase in their share of Social Security payroll taxes.
Alternatively, lawmakers could cut benefits now. They would need to reduce all current and scheduled benefits by 20.3% right now or impose an even steeper 24.1% cut on those who will become eligible for benefits in 2022 or later. If lawmakers procrastinate until 2035, the payroll tax would need to be boosted to 8.235%, or all benefits would have to be reduced by 24.9% starting in 2035. Some combination of those two strategies could also be a potential fix. But do not expect a solution soon: The current public health and economic crisis is the top priority today. Fixing Social Security will have to wait.
How Do the Projections Affect Your Financial Plan?
Since it is possible that 100% of your Social Security benefits may not be available to you, you and your advisor should incorporate this into your projections. If you are 60 or younger, you may want to consider using 75%-80% of your projected Social Security benefits as one scenario in your planning. And if you are older, think about stress testing your plan using 75-80% of projected benefits after 2034.
The report is also important to lawmakers so they can address any changes to Social Security. The more recent question has been whether benefits should be cut or expanded. There appears to be a political divide on this issue. Since Social Security does not add to the budget deficit, it cannot be addressed through budget reconciliation. Any changes to Social Security will have to occur through the regular legislative process. It remains to be seen how Social Security will be shaped in the future.
For more information, please contact your advisor.
About Tina A. Myers
As the Director of Financial Planning for Key Private Bank, Tina is responsible for managing the Central Planning Team, as well as overseeing the National Advisory Committee, Monthly National Advisory Call and any financial planning literature developed internally and externally. She works with our Regional Directors of Planning to help facilitate our best thinking and advice delivery to clients.
Tina earned a B.S. in Bus. Admin. from the Univ. of Richmond and an M.Tax from Virginia Commonwealth Univ. She is a CFP® certificant, CPA/PFS, and is an AEP®. She is Treasurer of the Put-in-Bay Community Swim & Sail Program. Tina received the 2016 Exceptional Service Award from the Cleveland Estate Planning Council and the Circle of Excellence Award by Key Private Bank in 2016 and 2018.