How Will High COLA Payouts Affect Social Security’s Finances?

May 27, 2022 / By Elaine Floyd, CFP®

The Social Security trustees are projecting an inflation rate of 2.4% under their 75-year, intermediate-cost scenario. According to the 2021 Trustees report (the 2022 edition is due out any day), the combined OASDI Trust Fund will run dry in 2034, after which ongoing revenues will be sufficient to pay about 78% of promised benefits.

With this year’s COLA bumping benefits up by 5.9% and next year’s COLA coming in as high as 7% or 8%, the question arises: will Social Security’s finances worsen as a result of these higher payouts?

A new report by the Congressional Research Service, Social Security: Cost-of-Living Adjustments (COLAs) and the System’s Projected Financial Shortfall, reminds us that inflation affects the revenue side too. As the average wage index (AWI) rises, the contribution and benefit base (CBB) also rises. If the AWI jumps, the maximum taxable wage base, currently $147,000, would go up commensurately, generating more tax revenues to fund the higher payouts. This wouldn’t happen evenly—the higher COLA may precede the rise in the CBB—but would even out in the end. And remember, we’re talking about a time horizon of 75 years. A temporary blip in inflation will not make that much difference in the long run.

Interestingly, a lower CPI projection would raise the program’s costs. Under the trustees’ high-cost projections, if the CPI were to rise at an annual rate of 1.8%, the trust fund would exhaust in 2031, three years earlier than with inflation running at 2.4%. This suggests that higher inflation actually helps the program, rather than hindering it.

Read the Congressional Research Report here.

As director of retirement and life planning for Horsesmouth, Elaine Floyd helps advisors better serve their clients by understanding the practical and technical aspects of retirement income planning. A former wirehouse broker, she earned her CFP designation in 1986.

 

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