The Social Security Old-Age and Survivors Insurance Trust Fund could be depleted a year or two earlier than expected as a result of larger payouts.
The 8.7 percent Social Security cost-of-living increase that was announced on Thursday is welcome news for retirees who are struggling to cope with surging inflation. But it could bring the social safety net program a step closer to insolvency.
Annual government reports in June showed that the Social Security Old-Age and Survivors Insurance Trust Fund, which pays out retiree benefits, would be depleted in 2034. At that time, the fund’s reserves will run out, leaving the system reliant on incoming tax revenue. Those funds will provide enough money to cover only 77 percent of scheduled benefits unless Congress intervenes.
Social Security is largely funded through payroll taxes, taxes levied on Social Security benefits and interest on money that the trust funds invest.
Now that the program will be paying out more to help retirees keep up with rising prices, the program will be under even more pressure to sustain itself. Budget experts warn that the reserves could run out before 2034 as a result of the larger benefits.
“This very large COLA increase is likely to bring the year of insolvency forward by a full year,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, referring to the cost-of-living adjustment. “It is just another reminder that procrastinating on addressing these imbalances leaves the people who depend on Social Security particularly vulnerable to a further deterioration in its finances.”
The increased outlays for retirees will be partly offset by higher taxes on Americans. Along with the bigger benefits, the maximum amount of earnings subject to the Social Security payroll tax will increase to $160,200 from $147,000. Employers and employees each contribute 6.2 percent of wages up to that salary threshold, which is adjusted every year based on average wage growth.
Because wages are rising, the amount of earnings subject to the tax is rising as well.
Ms. MacGuineas estimated that the Social Security Trust Fund could have been depleted as much as two years earlier without the offsetting effect of the higher tax threshold.
Kathleen Romig, director of Social Security and disability policy at the Center on Budget and Policy Priorities, said the depletion date could be accelerated by as much as two years. But she added that a couple of years of high inflation probably would not fundamentally change Social Security’s long-term financing outlook.
“It’s normal for Social Security’s trustees to update the expected reserve depletion date as circumstances change,” Ms. Romig said.
Ms. Romig noted that more than 65 million retirees count on Social Security for most of their income and that the cost-of-living increase would ensure that older Americans did not fall into poverty as they aged.
The June projections actually showed the depletion date of the fund being delayed by a year, from an earlier projection of 2033, the result of a stronger-than-expected economic recovery in 2021.
Anqi Chen, assistant director of savings research at the Center for Retirement Research at Boston College, said the impact of the cost-of-living adjustment on the Social Security Trust Fund would depend on a combination of wage growth and labor force participation in the U.S. economy.
“Higher wage growth would mean higher revenue for Social Security and a higher labor force participation would mean more workers contributing to the program, which also means higher revenue,” said Ms. Chen, who is also a senior research economist at the center.
The future of Social Security has emerged as a major issue in the midterm elections this year. Republicans have argued that their proposals are intended to protect the long-term viability of Social Security, but Democrats and President Biden have warned that if Republicans take control of Congress they will scale back the program and curb benefits for retirees.
“MAGA Republicans in Congress continue to threaten Social Security and Medicare — proposing to put them on the chopping block every five years, threatening benefits, and to change eligibility,” Karine Jean-Pierre, White House press secretary, said in a statement on Wednesday. “If Republicans in Congress have their way, seniors will pay more for prescription drugs and their Social Security benefits will never be secure.”
Source: Economy - nytimes.com
