Retire Better: Social Security recipients are getting a big raise — but also are falling further behind

When you’re getting 5.9% more in your Social Security payment, but the cost of living is up 6.8%, you’ve lost ground. Read More...

What Social Security giveth, the grocery store, landlord and pharmacy taketh away.

In October, the Social Security Administration announced that recipients would get a cost-of-living raise of 5.9%. That means the average recipient will get an estimated $1,674 a month beginning with the January check, equal to $20,088 a year.

But weeks later, Labor Department said the inflation rate—the cost-of-living index—jumped 6.8% for the 12 months ended Nov. 30, the fastest inflation rate since 1982. Food, housing, all the basics, are shooting up.

The math’s not hard here. If you’re getting 5.9% more, but the cost of living is up 6.8%, you’ve lost ground. Which means millions of Americans are being squeezed.

The danger here is that Social Security was designed to supplement income for retirees. In reality, it’s the only source of income that many of them have. According to the Social Security Administration:

Among elderly Social Security beneficiaries, 37% of men and 42% of women receive 50% or more of their income from Social Security.
Among elderly Social Security beneficiaries, 12% of men and 15% of women rely on Social Security for 90% or more of their income.

In an ideal world, retirement finances are supposed to resemble a three-legged stool: One leg represents pension income, the second personal savings, and the third Social Security. But as the above bullet points show, that’s fantasyland for all too many seniors.

On top of this, Social Security, which is now paying out more than it’s taking in, is scheduled to use up its vaunted reserve fund by 2033. After that, the Social Security Trustees say, they’ll only be able to pay recipients about 76 cents on the dollar.

Think about that. Inflation’s going up. Cost-of-living hikes aren’t keeping up. And, on the not-too-distant horizon, giant cuts loom.

Absent action to shore up Social Security, why will it be forced to make a 24% cut in 2034? The most basic explanation is this: Baby boomers are retiring in droves, and there aren’t enough younger taxpayers coming into the system to replace them.

On the first point, even before the pandemic, an estimated 10,000 Baby Boomers (born between 1946 and 1964) were leaving the workforce each day. Now, flush with gains from soaring stock and home prices, others are joining them. Any of these folks 62 or older is also eligible for Social Security (at reduced rate if claimed before full retirement age); the result has been an increase in the number of recipients.

On the second point, there aren’t enough younger taxpayers coming into the system to pay for this new flood of recipients. The U.S. birthrate now stands at a multi-decade low—the lowest, in fact, since the government began tracking this. At the same time, immigration—since America’s founding a rich source of eager workers laden with ideas, energy and entrepreneurial vision—has plunged. State Department data shows, for example, a 90% plunge in legal immigration from abroad during the second half of 2020.

How to fix Social Security?

More people applying for Social Security. Not enough workers paying Social Security taxes. Something’s got to give. Thus: the grim forecast that payroll taxes will only be able to pay 76% of benefits come 2034.

“Congress must address this problem,” Alicia H. Munnell, director of the Center for Retirement Research at Boston College, tells me. “It’s vital that we maintain confidence in Social Security and avoid these drastic cuts.”

Meanwhile, Mary Johnson, Social Security and Medicare policy analyst for The Senior Citizens League, a Washington-based advocacy group, points out that shoring up Social Security isn’t—or at least shouldn’t be—a partisan issue in Congress.

“Congress may be divided, but older constituents are not,” Johnson says. “A national survey we conducted found that survey participants equally divided among those who identify as Democrats, Republican and Independents, agreed that Social Security must be shored up.”

Of course, the main reason that Social Security hasn’t been shored up yet is because it involves doing something that no politician wants to do: inflict pain on voters. Lawmakers could, for example, lift the cap on income that’s subject to payroll taxes. The cap for 2022 will be $147,000. But lifting it is a de facto tax hike; good luck pushing that through Congress, particularly if as expected, Republicans take back the House next autumn.

Lawmakers could also raise the minimum eligibility age for Social Security, currently 62, or the eligibility age for full benefits, which currently depends on when you were born. But this is a de facto benefit cut—again a pain that no politician is eager to inflict on voters.

It’s for reasons lie this that Social Security, and entitlement programs in general, are called the “third rail of American politics.” No one wants to touch them. And so the problem lingers.