There's arguably no social program (sorry, Medicare) that's more important for seniors than Social Security.
According to the Social Security Administration's (SSA) April snapshot, 61.4 million people were receiving monthly benefits, and just over two-thirds of those were retired workers. The average retired worker was receiving about $1,366 a month, or nearly $16,400 a year. Though it may not sound like much, this $16,400 comprises at least 50% of all annual income for 61% of retired workers receiving Social Security benefits per the SSA.
Of course, Social Security is also set to face a number of major changes in less than two decades, at least according to the 2016 Social Security Trustees report. The ongoing retirement of baby boomers, a steady lengthening of life expectancies, and even the rich (who get beefier monthly checks from the SSA) living longer than lower-income Americans are weighing down Social Security. The Trustees have forecast that the Trust's $2.85 trillion in spare cash could be completely exhausted by 2034, which could lead to some sizable benefit cuts for current and future retirees.
Here's what to expect from Social Security in 2022
It's really tough to say what Social Security could look like in 2034 given the amount of political wrangling that's possible between now and then on Capitol Hill. But we can probably take a decent shot at forecasting what Social Security will look like five years from now, in 2022. While a lot can change even over the course of the next five years, here are some trends that I believe you can expect.
1. A surge in eligible retired workers
Probably the closest thing to a guarantee is that we're going to see a steady increase in the number of Americans eligible to qualify for Social Security benefits. With 41.7 million retired workers currently receiving benefits, which is 1.2 million higher than last year, it shouldn't be a shock if there are 48 million to 50 million eligible retired workers claiming benefits by 2022.
Why so many? Aside from the sheer number of boomers retiring over a two-decade span, most eligible seniors have a tendency to claim Social Security benefits earlier rather than later. Data from the Center for Retirement Research at Boston College from 2013 found that 60% of seniors claim benefits between ages 62 and 64, with another 30% claiming at or near their full retirement age (FRA) at ages 65 or 66. Just one in 10 seniors waited until after their FRA to sign up for benefits.
The SSA dangles quite the carrot for those who wait: 8% benefits growth for each year you hold off on claiming between ages 62 and 70. Apparently, most seniors are impatient and want their benefits now, or they simply don't understand the value of waiting. My money would be on the latter.
2. Higher COLAs
Another trend we could see carry over into 2022 is higher cost-of-living adjustments (COLA) for beneficiaries.
For those who may not recall, seniors wound up receiving no COLA whatsoever heading into 2010, 2011, and 2016, and the COLA they received this year was a meager 0.3%, the lowest on record in terms of increases. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which decides the fate of Social Security's COLA, has been dragged down in recent years by weaker crude/energy prices, as well as weak growth tied to the Great Recession (especially in 2010-2011).
However, the U.S. economy has been finding its stride in recent quarters, as evidenced by the Federal Reserve's efforts to tighten monetary policy. The Fed would be unlikely to continue tightening monetary policy if it didn't foresee steady growth for the U.S. economy. As the economy expands, the chance for a healthier increase in Social Security COLAs rises, too.
Keep in mind that recessions are a natural occurrence within the economy, and it's impossible to predict when the next one will occur. If one were not to occur prior to 2022, we should see more normalized COLA levels of perhaps 2% per year.
3. No "real" benefit growth
However -- and this is a really big "however" -- higher COLAs are unlikely to help Social Security recipients one iota five years from now.
The reason? Medicare Part B premiums are automatically withdrawn from most seniors' Social Security checks, and Part B premiums, which cover outpatient medical care, are rising at a much faster pace than 2% a year. This is a reflection of higher physician costs, growing demand for medical care amid a doctor shortage, and the high costs of physician-administered outpatient specialty drugs, such as cancer IV medicines.
If there is good news, it's that existing Social Security recipients who are also Medicare members won't see their Part B premiums spike because of the "hold harmless" clause. This clause ensures that Part B premiums never rise at a quicker pace than Social Security's COLA. But it also assures that essentially every cent seniors receive as a "raise" via their Social Security COLA will wind up paying for their Part B premiums -- thus, no real benefit growth for seniors.
4. Lower interest income for the OASDI
Though it might be out-of-sight, out-of-mind for most seniors, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust is set to see a major change beginning in 2020.
According to the Trustees report, the program will begin paying out more money to beneficiaries than it'll be generating from payroll taxes, interest income on its asset reserves, and via the taxation of benefits, by 2020. This means that by 2022, the program will start seeing a noticeable decline in the amount of interest income generated from its excess cash each year. For context, nearly $93 billion was generated in interest from special issue bonds and certificates of indebtedness for the OASDI in 2015. It's possible that higher interest rates could help somewhat offset the decline in asset reserves, but it won't stop Social Security interest income from declining.
The Trustees have forecast that the OASDI's asset reserves will be completely exhausted by 2034, meaning this $93 billion in interest income will be gone.
5. More "kicking the can" from Washington
Lastly, I wouldn't count on any real progress from Washington, which hasn't made any major changes to the Social Security program for 34 years.
Donald Trump pledged not to touch Social Security during his campaign, and while it's a promise that could possibly be broken, it's unlikely that Trump or his colleagues would risk drawing the ire of tens of millions of Americans by making changes to the program. With Trump in the Oval Office through at least January 2020, it seems unlikely that any major changes should be expected before then. It's always possible that midterm elections and the 2020 presidential election could lead to shake-ups that elicit Social Security changes, but it's clearly no guarantee.
The other ongoing issue is that Republicans and Democrats both have a workable fix for Social Security, and neither side is willing to back down. Democrats would like to see the maximum taxable earnings cap raised so that wealthier Americans pay more into the program, while Republicans would prefer to raise the full retirement age to reflect increased life expectancies. Both methods work to resolve Social Security's more than $11 trillion budget shortfall over the next 75 years, but neither side wants to cave to the other.
This has all the hallmarks of a political stalemate until at least 2022, if not longer.
Long story short, more worry could be in the forecast for Social Security beneficiaries in the coming five years.
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