Social Security is based on the principle that payroll taxes on current workers can pay the benefits of those who have retired. However, with so many Americans living longer, more and more money is required to pay the benefits of retired Americans.
Two new problems are further straining the system. The first is the massive inflation adjustment for 2022 payouts. The second is the coronavirus pandemic. These two problems are capable of depleting the Social Security Trust Fund.
2022 Social Security Increase
In 2022, Social Security Administration announced retirement payouts would jump by a staggering 5.9%. That’s the largest inflation adjustment in 40 years. The annual inflation adjustment is meant to help retirees keep up with the cost of living, which jumped astronomically in 2021.
However, this massive increase in payouts further depletes the Social Security Trust Fund, which was already slated to run out in 2033. According to the Committee for a Responsible Federal Budget, this date may now move up to 2032.
In one sense, the ominous term “Social Security depletion” isn’t quite as menacing as it sounds. Social Security payments are made from two sources: the Social Security Trust Fund, and more importantly, the payroll taxes collected from current workers. Estimates are that the Social Security Trust Fund may run out in 2033 — or perhaps 2032, thanks to the inflation adjustment for 2022. However, workers will still continue paying into the system.
This means that benefits can be maintained, albeit at about 76% of current levels. So, if the inflation adjustment accelerates the depletion of the Social Security Trust Fund by one year, that just means benefits may have to be cut one year earlier, not that the whole system will go bankrupt.
Read More: Novavax states COVID vaccine initiates an immune response to the Omicron variant
COVID-19 Ramifications
The long-lasting coronavirus pandemic has taken a big bite out of current contributions to Social Security, as employees couldn’t even report to work during the early phases of the pandemic, and many have yet to return to the workforce. According to the Bipartisan Policy Center, the economic effects of the coronavirus pandemic have accelerated the depletion of the Social Security Trust Fund by at least one year. In its worst-case scenario, the BPC indicated that funds may run out as soon as 2029.
The Bottom Line
Social Security has long been under the financial pressure of a decreasing workforce and an aging population of retirees. The 2022 Social Security payout increase and the coronavirus pandemic have only added to those financial stresses.
But we are still likely at least a decade away before Social Security becomes a real problem, and Congress is well aware of the hard choices it will need to make before that day arrives. For now, the 2022 inflation adjustment will provide retirees with some level of relief from the rising costs of goods and services.