Social Security benefits could be slashed earlier than expected

Although Social Security payments recently increased at their highest rate in 40 years, payments could soon be slashed by 20%. Here's why, and what you can do if you are struggling financially. (iStock)

As the Social Security Administration (SSA) runs low on funds, the projected date it will hit depletion was moved up to 2034, just 13 years out. The depletion date will occur when Social Security is forced to cut benefits by 20% due to a lack of funds.

The date was moved up due to a drop in tax revenue as a result of coronavirus-induced unemployment and labor shortages. With fewer people paying income tax in 2020, funding for the Social Security system dropped even as it continued to pay out benefits.

Because Americans continue to pay into Social Security through their income tax, the SSA isn't projected to run out of funds but will instead need to slash benefits by at least 20% to continue operating as more older Americans reach retirement age. 

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Inaction from Congress could result in massive payment cuts

Congress is working to prevent a benefit cut by introducing its new bill, Social Security 2100: A Sacred Trust. The bill, introduced in the House of Representatives by Rep. John Larson (D-Conn.), would first move the date that the SSA will need to cut benefits back to 2038, allowing more time to find a permanent solution for the administration.

It would also provide all beneficiaries with an average increase of about 2% and increase the payroll taxes subject to Social Security taxes, increasing the maximum taxable threshold to $400,000 rather than today’s $142,800. 

The bill has 194 Democrat cosponsors and would combine current Social Security trust funds, including Old-Age and Survivors (OASI) and Disability Insurance trust funds (DI), into a single fund to ensure all benefits are paid. 

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Inflation guides Social Security payments - until it doesn’t

Social Security paychecks are set to increase in 2022 by the largest percentage in nearly 40 years, according to the SSA. Next year, benefits will increase by 5.9% for about 70 million Americans, the highest increase since a 7.4% boost in 1982. 

This large increase is due to surging inflation, which increased by 5.4% annually in September, according to the latest report from the Bureau of Labor Statistics (BLS).

Under the new Social Security bill, the annual cost of living adjustment (COLA) formula would be adjusted to adapt the CPI-E formula. 

"This provision will help seniors who spend a greater portion of their income on health care and other necessities," Larson said. "Improved inflation protection will especially help older retirees and widows who are more likely to rely on Social Security benefits as they age."

If Congress can't reach an agreement concerning Social Security before 2034, inflation levels won't matter as benefits are slashed by about 20%. Payments will be forced to be determined by the funding available to the administration, rather than inflation levels and need. 

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