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CRS Updates Report on Social Security Shortfall to Reflect Inflation

The Congressional Research Service (CRS) has updated its periodic report on the finances of the Social Security system to account for the current and projected inflation rates. It further offers some insight into how finances and factors behind Social Security expenditures may affect benefits and the system’s finances.

“Recent news articles have suggested that the historically large 5.9% cost-of-living adjustment (COLA) payable in January 2022 will have a negative impact on the projected financial shortfall of the Social Security programs,” says the CRS in “Social Security: Cost-of-Living Adjustments (COLAs) and the System’s Projected Financial Shortfall.” Further they say, “If inflation persists, another large COLA may be payable in January 2023.” 

The Current State of Things 

This year, says the CRS, approximately 178 million workers will have jobs covered by Social Security, and the program likely will pay benefits to more than 65 million beneficiaries.

On Oct. 13, 2021, the Social Security Administration announced a 5.9% COLA payable in January 2022. For a retired worker receiving the average monthly benefit of $1,565 in 2021, that spells approximately a $91 increase in benefits, to $1,656. Thus, COLAs result in higher benefit amounts for beneficiaries and lead to higher program costs. 
Social Security’s costs currently exceed income. Because of this, says the report, assets held in  trust funds (excess revenues from prior years) are used to augment program income.

Crystal Ball

The report says that things won’t be getting any better. Annual deficits are projected to continue throughout the program’s 75-year projection period. 

Consequently, the CRS says, trust fund assets are projected to decline steadily from $2.9 trillion in 2021 to zero in 2034. Things don’t get any better after that, according to the report—scheduled tax revenues are projected to cover 78% of scheduled benefits initially, declining to 74% by 2095 under intermediate assumptions in the 2021 Annual Report of the Social Security Board of Trustees, the trustees’ best guess of future experience.

The 2021 Annual Report, submitted to Congress on Aug. 31, 2021, projected a COLA of 2.4% for 2023, and the federal fiscal year (FY) 2023 budget, submitted to Congress on March 28, 2022, projects a 2023 COLA almost 2 percentage points higher, 4.3%—lower than the COLA for 2022. 

The contribution and benefit base (CBB)—commonly referred to as the taxable maximum—is a cap on contributions and benefits. As a contribution base, it establishes the maximum amount of a worker’s earnings subject to the payroll tax. As a benefit base, it establishes the maximum amount of earnings used to calculate benefits. The CBB is indexed to the average wage index (AWI). Thus, the amount of economy-wide earnings subject to the Social Security payroll tax generally increases each year. 

  2021 2022 Change, 2021-22 2023 Peojection Projected Change, 2022-23
CBB Level $142,800 $147,000 +$4,200 $156,300 +$9,300

 

The CRS says that the COLA and CBB can interact in three possible combinations, and each combination affects the program’s financial status in a different way. 

1. A payable (positive) COLA and an increase in the CBB, which has happened in most years. A payable COLA would lead to higher benefit payments, while the increase in the CBB would lead to an increase in the total amount of earnings subject to the payroll tax. The degree to which the increase in revenues would offset the increase in costs would depend on the relative magnitude of each increase, as well as additional factors. 
2. A payable COLA while the CBB remains unchanged. A payable COLA would lead to higher benefit payments, while an unchanged CBB would result in roughly the same amount of earnings subject to the payroll tax. Under such a scenario, there would be an immediate increase in costs and relatively no change in revenues. 
3. NO COLA; that is, a flat or declining price index, while the CBB remains unchanged. By law, the CBB cannot increase if there is no COLA. In this instance, there would be no immediate change in revenues or costs.

These scenarios present the immediate and first-order effects of COLAs on Social Security’s financial status, says the report. It notes, that combinations of changes in CBB and COLAs can have varying long-term effects and second-order effects. 

For instance, in one year there may be a COLA but no increase in the CBB, so the increase in costs would not be offset by any increase in revenues. However, in subsequent years, there may be relatively small COLAs and relatively larger increases in the CBB. Perhaps, over a multiyear period, the increases in benefit costs would be more than fully offset by revenue increases, leading to improvements in Social Security’s financial status. 

Increases in the CBB are generally associated with higher average benefits due to growth in the AWI. Conversely, if the AWI were to decrease, the CBB would remain unchanged, and average benefits would be lower than if wage growth were to increase or remain level. In this instance, the CBB would remain unchanged. 

Any of these combinations, says the report, may induce behavior changes—such as changes in claiming ages, which could also affect Social Security’s financial status.