The Latest on Social Security
Social Security payments and thresholds are adjusted every year to keep pace with inflation, and benefits may also be adjusted to comply with legislative policy changes.
Benefits:
Qualified Americans may claim Social Security benefits anytime after reaching age 62, but claiming before their full retirement age reduces their monthly benefit amount. For anyone turning 62 on or after January 2, 2022, claiming their benefits as soon as they’re entitled will result in monthly payments 30 percent lower than if they had waited for their full retirement age of 67.1 Continuing to work after you have begun receiving benefits could boost future monthly payments if it increases your highest 35-year average indexed annual earnings amount.
Benefits can also increase via the Cost of Living Adjustment (COLA) calculated each year based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In some years, this change is zero, and in others it has been as high as 14.3 percent.2 The modest COLA of 1.3 percent which took effect in January of 2021 raised the average retired worker’s monthly benefit by $20, from $1,523 in 2020 to $1,543 in 2021.3 2022 will see a record COLA of 5.9% since 1982 when it was 7.4%.
For persons filing a Social Security claim in 2021, the maximum Social Security check an individual at full retirement age could receive was $3,148 a month, while someone claiming at age 70 could receive a maximum of $3,895.4 These amounts were $3,011 and $3,790, respectively, in 20205 - 2022 numbers are $3,345 at FRA and $4,194.6
Beneficiaries under full retirement age who work while they are collecting Social Security benefits will have part or all of their benefits temporarily withheld once their earnings reach an earnings limit. In 2021, this limit was set at $18,960 a year, or $1,580 a month (2022 is $19,560 or $1,630 per month). This is slightly more than 2020’s earnings limit of $18,240 a year ($1,520 a month). During the year in which you reach full retirement age, your annual earnings limit is substantially larger, and a smaller portion of your benefit is temporarily withheld. For those who reached full retirement age in 2021, that annual earnings limit was $50,520 ($4,210 a month) 2022 is $51,960 or $4,330 per month, up from $48,600 for the year ($4,050 a month) in 2020. Once a person reaches full retirement age, there is no penalty for working and claiming retirement benefits. Your benefit will be recalculated at that time, and you’ll be credited for any withheld earnings in the form of a higher monthly benefit.3,7
Trustee Projections
Each year, the Social Security Board of Trustees issues a report about the financial status of the program, including projections for its future solvency. The 2021 Trustee’s Report projected that the Old Age and Survivors Insurance (OASI) trust, which provides funding for the Social Security program and is credited with the Federal Insurance Contributions Act (FICA) tax collected on earnings each year, will become depleted in 2033, a year earlier than last year’s projections. The 2021 report also includes effects of the Covid-19 pandemic, which 2020’s report did not. Key factors contributing to this depletion included longer lifespans and a decreasing number of workers paying FICA taxes for every retired person collecting Social Security benefits. After depletion of the trust in 2033, barring changes to policy that would increase its funding, the program was projected to only be able to cover 76 percent (same as last year) of beneficiary payments using FICA taxes.8,15
Trustee Reports for each of the past 9 years have projected that the trust will be depleted some-time in the years 2033 to 2035.11
More recent calculations that seek to include some of the costs associated with the Covid-19 pandemic show the trust being depleted even sooner. A March 2021 report by the Congressional Budget Office estimated that the fund would shrink to zero in 2032 if no policy changes are enacted before then.16
Costs for the Social Security program have outstripped its funding in the past. During the years 1973 through 1983, the program depleted its trust funding significantly before the legislature enacted several changes to how the program operated, including gradually raising the full retirement age from 65 to 67 over the course of twenty-two years (2000-22). Those changes resulted in an accumulated surplus over the ensuing years.9,10
Tax Considerations:
Up to 85 percent of your Social Security benefits may be taxed if your “combined income” is above $25,000 for individual federal tax filers or $32,000 for joint filers. Combined income is the sum of your adjusted gross income plus non-taxable interest plus 50 percent of your Social Security income. 12
In addition, depending on where you live, you may be required to pay state tax on your Social Security benefits. In 2022, the number of states taxing Social Security will be reduced from 13 to 12.13
The threshold above which earnings are not subject to FICA tax rises each year. Taxable earnings were capped at $142,800 in 2021, up from $137,700 in 2020.14 In 2022, that figure rises to $147,000.
Will benefits be reduced in the future due to a shortfall?
Numerous policy changes have been proposed to forestall a sudden and substantial reduction of Social Security benefits within the next decade.
One suggested change is to increase the earnings that are subject to the FICA tax, in order to capture more tax income. That could be accomplished by raising the maximum earnings threshold, which would not affect people with incomes below that threshold ($147,000 in 202214). Such a change would have the biggest impact on the richest Americans; those with annual incomes in the 95th to 99th percentiles could see a drop of 1.3 percent in their earnings if the threshold were raised to $300,000, according to one study.18 Other scenarios that have been studied include eliminating the wage ceiling for the employer-paid portion of the FICA tax, which was projected to cut 50 percent from the 75-year deficit, or applying the tax to 90 percent of all earnings, which could cut the deficit by 48 percent.18 Recently, a variation on this theme -- applying the payroll tax to earnings over $400,000 -- has been under discussion.21
Linking Social Security COLAs to price growth instead of average wage growth – that is, to the “chained” CPI rather than the regular Consumer Price Index – was one of 120 policy ideas examined by the Social Security Administration (SSA) in 2014. The SSA posited that basing COLAs on chained CPI could cut the long-term deficit by 19 percent. COLAs could be 0.3 percent smaller annually if they were based on the chained CPI, which assumes that consumers buy cheaper versions of certain goods and services in the face of rising prices. Senior advocates would prefer COLAs being linked to the experimental CPI-E, an index the Bureau of Labor Statistics uses to track spending patterns of older Americans. The CPI-E tends to rise 0.2 percent faster than the regular Consumer Price Index, mainly due to the higher proportion of household spending devoted to medical care later in life.18, 19, 22
In a 2015 analysis, the SSA stated that switching to the chained CPI could reduce the median benefit in 2030 and thereafter by 3 percent annually, affecting over 90 percent of beneficiaries. In contrast, changing to the CPI-E was estimated to raise the median benefit in 2030 and later years by two percent annually, with over 80 percent of beneficiaries projected to receive a larger payment as a result.20
Another frequently explored adjustment is a further increase in the full retirement age. In early 2021, the Congressional Research Service conducted an analysis of several proposed increases to the full retirement age using different schedules and in combination with different adjustments to the early retirement age (currently 62) and the delayed retirement age (currently 70). Projected reductions to the OASI trust shortfall under these different scenarios ranged from 18 percent to 38 percent.23
The payroll tax could simply be raised from 12.4 percent; taking it up to 15.5 percent could get rid of the long-range shortfall and possibly leave a surplus, according to SSA.18 Currently the tax is split equally between employees and employers, so if implemented in the same way, that change would result in a tax increase of 1.5 percent (the difference between 6.2 and 7.75 percent) for each party.
What if some of Social Security’s reserves were invested in equities rather than Treasuries? Economists’ opinions regarding this strategy run the gamut, as it would increase risk while also increasing potential returns. The SSA notes that if 40 percent of the Social Security trust funds were directed into equities with an average inflation-adjusted return of 6.4 percent per year – as opposed to special-issue Treasuries with long-term, inflation-adjusted returns of 2.9 percent a year – Social Security’s long-range funding gap would decrease by 21 percent.18 A separate analysis conducted by the Brookings Institute in 2016 found that gradually moving 40 percent of the trust into equities over a period of 15 years would likely extend its solvency until at least 2090.24
If the OASI were ever to reach the point of depletion and the Social Security program were forced to pay out reduced benefits, there is no law specifying how the benefits might be reduced. The shortfall could be simply applied to all beneficiaries across the board, which would mean a 24 percent reduction in all benefit checks beginning in 2034. At that point, the program would be able to continue at that rate of benefits until 2095, when it is projected that a further 5 percent reduction would be required.8
Can you count on Social Security to fund your retirement?
If you’re anxious about whether you’ll be able to count on Social Security during your retirement, you’re not alone. A 2021 survey by Nationwide showed that 71 percent of adults worry about Social Security running out of funding during their lifetime, and 47 percent of millennials report they do not believe they will receive any benefits at all from the program when they retire.25
The Social Security Administration stresses that the program is not meant to supply all the income a retired person will need to live on.25 In the near future, policy discussions may revolve around whether Social Security is meant to fund mainly low-income retirees, as a poverty prevention measure, as opposed to paying back all workers who have paid into the system during their careers. The results of those discussions could lead to profound changes in the program as well as in which Americans might be able to count on it to supply a significant portion of their retirement income.21
In a 2021 interview, Shai Akabas, director of economic policy at the Bipartisan Policy Center, captured the dilemma many Americans face when he said, "Social Security is meant to be the bedrock of retirement planning, but instead it’s turned into one of the greatest sources of uncertainty."27
Citations.
1 - https://www.ssa.gov/benefits/retirement/planner/agereduction.html
2 - https://www.ssa.gov/OACT/COLA/colaseries.html
3 - https://www.aarp.org/retirement/social-security/info-2020/biggest-social-security-changes-for-2021.html
4 - https://www.aarp.org/retirement/social-security/questions-answers/maximum-ss-benefit.html
5 - https://www.thestreet.com/retirement/social-security/maximum-social-security-benefit-14786537
6 - https://www.ssa.gov/oact/cola/examplemax.html
7 - https://www.ssa.gov/OACT/COLA/rtea.html
8 - https://www.ssa.gov/OACT/TRSUM/index.html
9- https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html
10 - https://www.ssa.gov/pressoffice/IncRetAge.html
11 - https://www.ssa.gov/oact/solvency/index.html
12 - https://www.ssa.gov/benefits/retirement/planner/taxes.html
13 - https://taxfoundation.org/states-that-tax-social-security-benefits
14 - https://www.ssa.gov/benefits/retirement/planner/maxtax.html
15 - https://www.gao.gov/products/gao-21-275sp
16 - https://www.cbo.gov/system/files/2021-03/56977-LTBO-2021.pdf
17 - https://budgetmodel.wharton.upenn.edu/issues/2019/12/17/policy-options-raising-the-social-security-taxable-maximum
18 - https://money.com/social-security-reforms-quick-guide/
19 - https://www.ssa.gov/oact/solvency/provisions_tr2014/
20 - https://www.ssa.gov/policy/docs/projections/policy-options/summary.html
21 - https://www.cnbc.com/2021/01/23/president-biden-could-make-big-social-security-changes-this-year.html
22 - https://assets.aarp.org/rgcenter/econ/dd132_cpie.pdf
23 - https://crsreports.congress.gov/product/pdf/R/R44670
24 - https://www.brookings.edu/research/how-would-investing-in-equities-have-affected-the-social-security-trust-fund/
25 - https://nationwidefinancial.com/media/pdf/NFM-20936AO.pdf
26 - https://www.ssa.gov/pubs/EN-05-10024.pdf
27 - https://www.cnbc.com/2021/04/20/social-security-reform-could-move-ahead-after-trust-act-is-introduced.html
Related Social Security Articles:
"The Impact of Health Care Costs on Social Security" We’ve calculated the budget challenges over 20 years for a hypothetical couple receiving the average Social Security income and facing average health care costs during retirement.
"What is the Social Security 2100 Act?" Specifics of legislation to ensure that Social Security remains solvent through 2100, first introduced in 2014 and promising to be under consideration again in 2021.
"Verifying Social Security Records" Explains why and how to check the data in your profile at the Social Security online hub.
"Claiming Your Social Security Benefits" Provides a timeline of milestone ages related to Social Security benefits.
"The Uncertain Future of Social Security" It’s up to the Legislature to ensure that this program has the funds to continue paying all promised benefits to future retirees.
