It’s been four years since COVID-19 reared its ugly head, yet we’re still dealing with the damage it left behind. Since its start in 2020, the pandemic has thrown our economy into a frenzy, forcing the federal government to try to prevent a recession while combating inflation. This has led to a series of changes — some specifically targeting interest rates. Since 2022, the Federal Reserve has raised key interest rates nearly a dozen times, impacting things like the stock and housing markets. But how is it impacting federal programs like Social Security?
Generally speaking, lower interest rates seem like a good thing, especially when it comes to making big purchases like buying a new home or car, but that’s not the case for retirees who are relying on Social Security benefits or fixed-income securities for income. Here’s why: Lower interest rates lead to lower yields on fixed-income assets, which means the monthly payments retirees rely on will most likely be lower than expected. This could become a real problem for older adults who depend on this income to pay bills and buy groceries. But lower interest rates don’t just impact older adults — they affect Social Security’s finances, too.
Where interest rates come into play
We know that Social Security is funded in part through taxpayer dollars, but it also has two separate trust funds that are used to help pay recipients. Retirement and survivors benefits come from the Old-Age and Survivors Insurance (OSAI) Trust Fund. Similarly, the Disability Insurance (DI) Trust Fund pays those on disability. Social Security taxes and other income not being used to pay benefits in the current year are then deposited into these accounts.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Now here’s where the interest comes into play. By law, the funds in both trusts must be invested into special U.S. Treasury bonds guaranteed by the government. From there, market-rate interest is paid to the trust funds on bonds they hold. Once they’ve matured, or are needed to pay benefits, the Treasury redeems them. So, lower interest rates mean a lower amount of money is being deposited into the accounts. So, does this mean higher interest rates are better?
State of the economy plays a role
The answer to that question really depends on the state of the economy. High interest rates are good for Social Security’s trust funds because more interest can be generated, but if high interest rates are being implemented as a response to an overheated economy, as we’ve experienced in the past few years, the potential for a recession is there. A recession leads to job losses, meaning payroll tax revenue would decline, and it’s a domino effect from there.
While certain aspects of a recession, like job loss, may not directly impact a retiree’s Social Security check, the inflation caused as a result definitely will. This is just one of many reasons why it is so important to adequately plan for retirement. An estate, tax and financial planner can help you account for these fluctuations and present other alternatives to help supplement your income, ultimately giving you more financial control in your retirement.
Pat Simasko is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Simasko Law is a separate entity and not affiliated with CoreCap Advisors. The information provided here is not tax, investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Related Content
- How to Cut Your Taxes as Short-Term Interest Rates Come Down
- How to Ride the Waves of Interest Rates and Inflation
- All About Designating Beneficiaries in Estate Planning
- What's Going on with Social Security — and How Concerned Should You Be?
- Three Social Security Changes in 2024 to Know
-
How Prepaid Verizon Phone Service Works and When It's a Smart ChoiceExplore the differences between Verizon Prepaid and Verizon Postpaid plans—costs, perks, flexibility, and when going prepaid makes sense.
-
Try This One-Minute Test to Uncover Hidden Health RisksFinding out this little-known fact about your body could reveal your risk of heart disease and more. It's a simple, free check for healthy aging.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
-
Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs InSome brokerage firms are promoting 'event contracts,' which are essentially yes-or-no wagers, blurring the lines between investing and gambling.
-
Supermarkets Have Become a Pickpockets' Paradise: How to Avoid Falling VictimSome stores regularly rearrange inventory with the aim of increasing purchases, and they're creating opportunities for thieves to steal from customers.
-
I'm a Wealth Adviser: These Are the Pros and Cons of Alternative Investments in Workplace Retirement AccountsWhile alternatives offer diversification and higher potential returns, including them in your workplace retirement plan would require careful consideration.
