That bump you get on Social Security benefits is more likely to make the system insolvent – Community News
Social Security

That bump you get on Social Security benefits is more likely to make the system insolvent

According to a recent report from Social Security trustees, the trust fund that pays retirees’ benefits (OASDI, or Old Age and Survivors Insurance fund) will be exhausted by 2033. This means that the fund will be exhausted and there will be nothing left in its portfolio to help pay distributions. However, it does not mean that all payments will be stopped: there will still be payroll and income tax collections on benefits, but the trustees’ report estimates that this could cover about 76% of the planned benefits. When it comes to that, recipients may receive their payments delayed, or on time, but not in full.

This raises a legal problem, as noted by a recent Congressional Research Service (CRS) report: The Social Security Act provides that beneficiaries are legally entitled to their full scheduled benefits, but the Anti-Deficiency Act prohibits government spending that exceeds available funds. If the money is allowed to run out and 100% of all benefits cannot be paid out, the conflict between the two federal laws suggests the Supreme Court may become involved. This will be an annoying thing that is guaranteed to make a lot of people very angry.

What to do? The Social Security trustees think benefits should be cut between 22% and 26%, or the Social Security payroll tax rate should rise to maybe 15.8% from the current 12.4%, or a combination of both will be. should be worked out when the funds reach the brink of insolvency. Given the way people vote, higher taxes for the young would be more likely than smaller benefits for the elderly. Neither solution will be popular.

The CRS concludes its report with the clear truth that the sooner changes to Social Security policy are made, the better, as it would give both employees and beneficiaries more time to plan and adjust their work and savings behavior and avoid abrupt changes in the system. to prevent.

You may wonder if the CRS researchers who drafted this report ever set foot in the major chambers of Congress (probably they have, since the CRS is an office of the Library of Congress) and first-hand witnessed the bitterness with which lawmakers manage them. to dawn. The chance that something of this magnitude can be tackled in the current environment is nil, at least for the foreseeable future.

Meanwhile, inflation rates are rising to levels that seemed unimaginable just a few quarters ago. Social Security benefits are adjusted at the end of each third quarter according to CPI-W, an inflation measure. The most recent adjustment was 5.9%, the highest level since the 7.4% adjustment in 1982.

On the face of it, this seems like good news for benefit claimants, who will see their highest rise in years. But Social Security trust funds are invested in special-issue US Treasury bonds with an average maturity of about 7 years, and this is a problem. In 1982, the 7-year US Treasury had a return of 11.7%, well above that year’s 7.4% payout increase. By contrast, the 7-year US Treasury bill had a return of 1.3% at the end of 3Q 2021, much less than this year’s increase of 5.9%.

The fact that interest rates on the US Treasury are stubbornly low is a real drag on the viability of Social Security funds, as their insolvency date will be earlier than 2033 if current trends continue. It’s worth pointing out that the Social Security Managers’ report came out a month before the last CPI-W adjustment, which significantly worsened things for the funds. From the beneficiaries’ point of view, the picture is equally complex and daunting.

Workers closer to retirement are least likely to face higher payroll taxes, given the reluctance of lawmakers to address this issue in the short term. The hyper-politicized environment of the day makes anyone willing to tackle such a thing an immediate political target. This means that those further away from retirement are most at risk of being hit by a much higher payroll tax rate.

If the benefits were to be reduced, the question arises who will bear the brunt of the discount. Making smaller payments or a higher retirement age eligible for those most recent in the system would create an unacceptable two-tier system of beneficiaries: those who transitioned into the current system with higher payments and an earlier start of benefits and the unfortunates living under a new, much less generous regime. Again, it seems more likely that in such a contest, younger generations will get the short straw.

Planning for a change in Social Security is problematic, as it is far too early to take preventive action without knowing which way the chips might fall.

Would the self-employed be better off than W-2 employees? Self-employment compensation structured by a mix of salary (which is subject to SS tax) and dividends (which is not) as opposed to salary alone would reduce tax liability but potentially lower benefits because they are calculated on salary history. And this would certainly be subject to close scrutiny by tax authorities, however depraved they may remain.

Would it pay to claim early and bet you’re part of a privileged group of beneficiaries? This would reduce the potential number of benefits that could be gained beyond claiming full retirement age, and it could prove to be a very bad bet if benefits are eventually reduced across the board.

The best advice for future benefit recipients on these and other matters is disappointing: do nothing for the time being, but remain alert to developments. Those who can may want to redouble their focus on building their savings and rely less on future Social Security benefits in their planning.

The relationship between inflation and government bonds will be one of the key variables to watch as this drama unfolds. If nominal interest rates don’t move closer to inflation in the coming quarters (creating problems on other fronts) or if inflation isn’t “transient,” as the Federal Reserve emphasizes, Social Security’s day of reckoning could come significantly sooner than even the most bleak forecasts have it. This is the unfortunate warning for those planning to rely on Social Security benefits to fund their retirement years.