Social Security Getting Less Secure

Social Security has been called the original annuity for American retirees, with the first check going out to Ida May Fuller in 1940.

In the decades since, the role of Social Security evolved greatly, and retirees continued to live longer and longer.

More changes are on the way that could be the most significant overhaul of Social Security since 1983 legislation taxed some benefits and raised the age for full benefits.

Annuities are already gaining more mainstream prominence with advisors as pensions wane. With Social Security on shaky ground, and annuity products evolving to address needs such as long-term care, the door could swing open even wider for guaranteed income options.

“We see a role for annuities in filling the gap that Social Security can’t provide for and helping to mitigate risk and have that safe security that [retirees] want,” Jason Fichtner, former acting deputy commissioner of the Social Security Administration, told InsuranceNewsNet this summer.

Pandemic Fallout

Everyone knew Social Security would need to be fixed from Washington, D.C. But with the trust fund finances secure until the mid-2030s and the timing never right for a sensitive political issue, Congress contented itself with kicking the can down the road.

Then COVID-19 happened.

With fewer people working, and earning less, Social Security’s revenue is in decline. In fact, the program is sliding toward depletion of its trust funds in little more than a decade, the program’s trustees said in a stark report released in late August.

Both of Social Security’s benefit programs, Old-Age Survivors Insurance (OASI) for older adults, and Disability Insurance for those unable to work, failed the trustees’ tests of short-range financial adequacy, the Washington Times reported.

The trustees said that while the trajectory has been grim for some time, the pandemic and the related economic downturn took a significant toll on Social Security. Trustees adjusted the deadline for when the trust funds will be depleted and the program will no longer be able to pay out full promised benefits.

The new deadline is 2034, and payments will be reduced to 78% of what was promised, the trustees said.

“The pandemic and precipitous recession have clearly had significant effects on the actuarial status of the OASI and DI trust funds, and the future course of the pandemic is still uncertain,” the trustees said.

Medicare was similarly affected by the pandemic, said the trustees, as income plummeted and expenses surged, with payments for testing and treatment of an older population particularly ravaged by the disease.

‘More Than Offsetting’

But Medicare beneficiaries also put off procedures amid the pandemic, “more than offsetting” the new costs, the trustees said in a separate report on Medicare, the federal health program for those 65 and older.

The trustees didn’t calculate the impact of higher death rates on Medicare but said otherwise, the pandemic is expected not to change the program’s outlook where it faces “a substantial financial shortfall.” The 2021 reports is the first to take full stock of the pandemic.

COVID-19 deaths have cut into the projected growth of old-age beneficiaries of Social Security. People left the workforce, trustees reported, sapping the program of income. And a birth dearth has cut into the future workers the program had projected in previous reports.

Funded by a payroll tax applied to wages earned, Social Security’s finances have been declining for years, with annual payroll tax income insufficient to cover the program’s benefit payments since 2010.

The program has relied on interest paid into the trust funds over the past 25 years, when revenue was greater than payouts and the excess income was pumped into the trust funds, earning interest from intragovernmental loans.

This year will be the first that the combined income from payroll taxes and interest won’t be enough to cover promised benefits, the trustees said. That imbalance will continue for the rest of the century, with the two combined trust funds depleted in 2034.

Under the law, Social Security then will have to cut its payments to meet income, and will pay out 78 cents on each dollar the program has promised to pay. By 2095, the end of the 75-year actuarial period the trustees studied, the program will pay out 74 cents of each dollar promised.

Chuck Blahous, formerly public trustee for Social Security, told the Washington Times, “If we wanted to fix the system and we wanted to act immediately, we would have to cut benefits 21% next year.”

The ratio of workers supporting retirees has flipped, another underlying issue.

From 1974 to 2008, the ratio was 3.2 to 3.4 workers per beneficiary. That began to decline with the Great Recession, and is now down to 2.7 workers per beneficiary. By 2035, when baby boomers will mostly have retired, it will be 2.3 workers per beneficiary.

Good News/Bad News

Retirees received good news in August when it was announced that the Social Security cost-of-living adjustment (COLA) could be as high as 6.2% in 2022, likely the highest in 40 years.

But is that really good news?

The Social Security Administration calculates the COLA each year by using the Consumer Price Index for Urban Wage Earners and Clerical Workers. The 2022 calculation will be based on data through the third quarter and is typically announced in October. The increase in benefits takes effect in January.

Unfortunately for retirees, a 6.2% COLA increase could turn out to be negligible, say researchers at the Center for Retirement Research at Boston College.

The bad news is that Medicare Part B premiums (for physician and outpatient services) are typically deducted from Social Security benefits before recipients see their checks. While benefits increase each year, so do Medicare Part B premiums.

From 2000 to 2020, Medicare Part B premiums increased by a yearly average of 5.9%. But the average annual increase to the Social Security COLA was 2.2% over the same period.

The amount someone pays for Medicare Part B depends on their income. In 2021, the monthly premium is $148.50 for single individuals with up to $88,000 in income and married couples with up to $176,000.

Taxes also impact how much recipients benefit from Social Security, explained Alicia H. Munnell, director of the center, and Patrick Hubbard, a research associate, in the paper, “The Impact of Inflation on Social Security Benefits.”

Under current law, individuals with less than $25,000 and married couples filing jointly with less than $32,000 of “combined income” do not have to pay taxes on their benefits. Above those thresholds, recipients must pay taxes on up to 85 percent of their benefits.

It all adds up to mean retirees are getting less and less financial support from the same dollar of Social Security with each passing year.

“Rising Medicare premiums mean that a larger and larger chunk of the Social Security benefit goes to health insurance, so the net benefit available for non-health expenditures does not keep pace with inflation,” the researchers concluded. “Second, a personal income tax with unindexed thresholds for benefit taxation means that wage growth and inflation will subject an increasing portion of Social Security benefits to taxation.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.