No Need to Panic: Social Security Is NOT Running Out

Yes, Social Security is undergoing some changes, including a possible reduction in benefits in the not-too-distant future – but the checks won’t stop coming. Here’s why the program is changing and what to expect.

By Andrew Rosen, CFP®, CEP

published 18 November 2021

in Features

A retired man gasps with a panicked look on his face.

(Image credit: Getty Images)

Social Security is a great, noble and necessary government program established by President Roosevelt in 1935. In almost 90 years, there have been minimal changes to Social Security benefits. And with people living longer, a new program is needed.

Given this history, it is no surprise that changes are coming to Social Security. To eradicate panic, it is essential to understand that the worst-case scenario is an almost 25% reduction in benefits. So, while not ideal, changes to Social Security – or as others have reported “running out” – will not mean zero benefits.

Despite the possibility of a decrease in benefits down the road, there are important reasons why dramatic changes will not be made to Social Security. First and foremost, it would be economically catastrophic to eliminate Social Security. Many retirees and future retirees rely entirely on Social Security as their primary source of income. So, to remove its financial benefits would be inhumane and cause irreparable financial implications to the United States government.

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It is also political self-annihilation for the U.S. to consider eliminating the Social Security program. In a country that continues to face dramatic political polarization, Social Security is one of the only bipartisan issues that neither party is willing to touch.

Social Security changes are happening in general because the program is outdated. The reason these benefits are changing now and the changes that we are seeing are related to three significant factors: COLA (cost-of-living adjustment), FICA (Federal Insurance Contributions Act) and FRA (full retirement age).

COLA is the increase made to Social Security and Supplemental Security Income to counteract the effects of inflation. In 2022, individuals currently receiving Social Security benefits will receive a 5.9% increase, the highest raise since 1982. To determine the exact dollar amount you will receive in 2022, take your current benefit, and multiply it by 1.059%.

The increase in Social Security is to counteract the current uptick in the cost of consumer goods. These price increases include essential commodities such as oil and gas. And the expected rise in prices for most goods is 5.9%.

So, by understanding how COLA works, the likely outcome in the foreseen future is a combination of smaller Social Security increases, later ages to collect these benefits, and more income tax.

FICA stands for the Federal Insurance Contributions Act and is the dollar amount deducted from each paycheck. Your nine-digit Social Security number helps accurately record your covered wages or self-employment. As you work and pay FICA taxes, you earn credits for Social Security benefits.

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With the expected increase in the cost of living, the limits on the income subject to FICA taxes are naturally increasing. In 2021 you were taxed on your first $142,800 in income to help fund Social Security. But with the almost additional 6% COLA for 2022, the government is increasing taxable FICA wages to $147,000 next year.

FRA, full retirement age, has also on the rise over the past two decades. Most recently, for those born in 1960 or later, the new full retirement age is 67, increasing two months.

The increase in FRA affects those who turn 62 in 2022 and anyone younger than that, because this new retirement age is a trend that will continue for the foreseeable future. So, starting in 2022, 67 is the age at which you can collect 100% of your designated benefit. Note, however, that you can still collect a reduced benefit as early as 62 or an increased benefit as late as 70.

Along with the increase in COLA, FICA and FRA, you will see various changes on your Social Security statement in 2022. Instead of seeing a forecast of Social Security benefits for three years – age 62, FRA age and age 70 – you will now see nine different years with benefit estimates (starting with the amount you’d get at age 62 and ending with age 70).

The new statements will also include your updated disability benefit amount and what your spouse or children would receive if you pass away. And there will be more information on your earnings history and formulas for calculating benefits.

If you are under 60, your new Social Security statements will soon be available at www.ssa.gov. Those who are 60 years or older and who have not created an online account will continue to receive paper statements.

The other expected change on Social Security is that the trust fund is estimated to deplete by 2033, an entire year sooner than initially expected. The depletion is due to many factors, such as COVID, an aging population, more people dying than being born, and more money being withdrawn than being contributed. Another reason for our trust fund rundown is our government’s propensity to beg, borrow and steal from it over the past few decades.

The best way to prepare for the upcoming changes to Social Security is to know the facts. Humanity has a way of reacting before pausing to learn what is happening. So hopefully, this brief overview helps demystify the Social Security “running out” misnomer.

Working with a financial planner is also an excellent way to plan for your retirement income. By saving throughout your life, there will be less concern regarding Social Security’s changes in your future and your finances.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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In March 2010, Andrew Rosen joined Diversified, bringing with him nine years of financial industry experience. As a financial planner, Andrew forges lifelong relationships with clients, coaching them through all stages of life. He has obtained his Series 6, 7 and 63, along with property/casualty and health/life insurance licenses. Andrew consistently delivers high-level, concierge service to all clients.