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Illustration of Social Security card saying COLA: Since 1975

Retirement Planning > Social Security > Social Security Funding

Social Security Trust Funds Hit by Big 2022, 2023 COLAs

By John Manganaro

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What You Need to Know

  • Various factors are effecting Social Security, from lower projected GDP growth to greater longevity among beneficiaries.

The Social Security and Medicare boards of trustees dropped a bombshell Friday, saying the primary trust fund used to pay retirement benefits is now projected to become depleted in 2033 — one year sooner than was estimated last year.

At that time, income from payroll tax revenue is expected to fund 77% of scheduled Social Security benefits, according to the latest report.

Several factors have weakened the already precarious financial position of the retirement trust fund, including lower projected economic growth and greater longevity among beneficiaries, according to several Social Security experts.

Two consecutive years of high cost-of-living increases (5.9% in 2022 and 8.7% in 2023) have also caused some additional erosion in trust fund solvency, says Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.

However, Johnson says a lower cost of living adjustment (or COLA) is likely next year, and she emphasizes that Social Security “remains very fixable.”

In fact, Johnson and others are encouraging financial services professionals to work to dispel key misconceptions about the Social Security program, both with respect to its solvency and the best ways to maximize benefits.

“Reviewing the report, I notice the intermediate COLA forecast is 3.3% for 2024, and the ‘low’ forecast is 3.1%,” Johnson said. “Those are in line with CPI-W data through February 2023, but the COLA in 2024 may be lower than the trustees forecast.” (The CPI-W index tracks retail prices as they affect urban hourly wage earners and clerical workers.)

Each month, Johnson estimates the past 12-month average inflation rate of the CPI-W and then projects third-quarter inflation for 2023 — which will be used to determine the 2024 COLA.

The long-term CPI-W trend since June of 2022 has been steadily downward, despite the recent higher inflation readings in January and February of 2023, she says.

Ultimately, Americans can expect to continue to receive COLAs in the years ahead, as these are baked into the benefit calculation formula, Johnson explains.

That said, it will be crucial for lawmakers to act soon to resolve the critical program’s funding woes. If a consensus isn’t achieved, she warns, millions of older Americans could slide into poverty.

That warning was also shared Friday by AARP CEO Jo Ann Jenkins, who issued a statement in response to the new report. “Social Security provides retirement income to more than 50 million Americans and is the largest source of income for most retirees,” Jenkins said.

“Medicare is the primary or only source of health care for most older Americans. Workers earn benefits by paying into both programs over the course of their careers with the promise that these programs will support them when they stop working,” she stated.

According to Jenkins, Social Security and Medicare are far and away the top issues that AARP members care about. Echoing Johnson and others, she explained that the next several years represent a “promising time when leaders from both parties have committed to protecting these vital programs.”

“It will take hard work to find bipartisan agreement, but this report shows how essential it is that leaders in Washington come together for the good of the country,” Jenkins said.

(Image: David Palmer/ALM)

John Manganaro

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