Social Security: If the COLA Keeps Going Up, Will Funds Run Out Before I Retire?
The Social Security Administration is expected to announce its biggest annual cost-of-living adjustment in more than 40 years on Thursday as the agency looks to help beneficiaries deal with soaring inflation. That’s good news for seniors who depend on Social Security, but it raises questions about how long the program can sustain itself if it keeps boosting payments to recipients every year.
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As has been widely reported, Social Security’s cash reserves are expected to be fully depleted by the middle of next decade. Once those funds are gone, annual taxes are expected to cover less than 80% of the benefits each year after that — which means recipients could face lower payments.
Historically high cost-of-living adjustments might exacerbate the problem. The estimated Social Security COLA for 2023 is 8.7%, which would represent the biggest annual increase since the 11.2% adjustment in 1981. An 8.7% bump would translate into an average monthly increase of $144.10, CBS News reported.
Next year’s steep projected COLA — which comes on top of a 5.9% COLA in 2022 — will add tens of billions of dollars to Social Security’s liabilities, Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told CNBC.
“That will cost the program enough money that it could bring the insolvency date forward a year sooner,” MacGuineas said.
But there’s also reason to believe that insolvency could happen later than expected, at least according to the SSA’s latest annual trustees report. In that report, the SSA said the Old-Age and Survivors Insurance Trust Fund — which pays retirement and survivors benefits — will “be able to pay scheduled benefits on a timely basis until 2034, one year later than reported last year.” At that time, the fund’s reserves will become depleted, and continuing tax income will be sufficient to pay 77% of scheduled benefits.
The latest estimates were based on the economic recovery from the 2020 recession, which the SSA said “has been stronger and faster than assumed in last year’s reports, with positive effects on the projected actuarial status of the trust funds in these reports.”
As Money reported, a rapidly improving labor market accounts for much of the gains. When more people are working and seeing higher pay, it translates into more tax revenue to fund Social Security.
That doesn’t mean Social Security is suddenly on sound financial footing. The program will continue to be strained by the combination of retiring baby boomers and lower birth rates, the latter of which means there will be a smaller supply of workers — and less tax revenue.
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Because of Social Security’s uncertain financial status, experts urge Americans to build up their 401(k)s and other retirement savings accounts so they don’t have to rely too heavily on Social Security benefits when they leave the workforce.
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