How Social Security Increases Will Affect Americans

By Brent Radcliffe | October 21, 2011 AAA
How Social Security Increases Will Affect Americans

Welcome to the age of the Baby Boomer. As more Americans retire they will place increasing pressure on America's pension system for the elderly: Social Security. Twenty percent of Americans already rely on Social Security and its accompanying disability program as sources of income. As the general population grays, this percentage will grow.

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The recent announcement of a 3.6% increase in the amount received in each Social Security check may be considered a blessing for retirees and the disabled, many of whom have seen the value of their savings plummet following the financial crisis. Recipients of Social Security checks will receive an extra $39 per month on average, while those receiving Supplemental Security Income (SSI) will see an additional $18 per month. The cost of living adjustment (COLA) increase comes after a two year gap of benefit adjustments, ostensibly because inflation has been low since 2009. Social Security payments are federally mandated to keep in step with inflation. (To find out more about Social Security basics, check out: Introduction To Social Security.)

What Will the Impact Be?
The additional monthly income could help boost U.S. growth, though many 2012 estimates already have taken into account the COLA increase. At such a relatively low amount – the increase will only add up to $30 billion – it is not expected to make a substantial impact. The additional money will be partially offset by higher Medicare premiums. The lion's share of the funds will come from an increase in the base level of income subject to Social Security taxes. Currently, taxpayers only have Social Security taxes on the first $106,800 in wages, but this will increase to $110,100.

While the percentage bump may be great for those cashing checks, the Social Security program still faces a bleak future. It is set to pay out $727 billion this year, with the adjustment adding up to $30 billion more. The savings rate of most American households has been too low to provide adequate income in retirement, but the program may not be able to survive for the next generation without a combination of benefit cuts and tax increases. The protracted budget battle in Washington has placed due focus on social programs, though Social Security has so far escaped intense scrutiny. This is most likely due to the power of those lobbying on behalf of retirees, especially since older Americans are more likely to vote in elections. Some reforms, such as adjusting how payments are matched with inflation, will result in fewer payment increases and may be politically impossible. Other proposals to increasing solvency of the Social Security fund include adjusting the formula used to calculate benefits.

Adjusting According to Inflation
Until Congress takes aim at the pressing matter of Social Security, retirees can expect their monthly checks to adjust according to inflation. While the prospect of more money down the road is likely to be greeted with a smile, current economic conditions might not create the inflationary environment that will lead to bigger checks. The previous adjustment – a 5.8% increase back in 2009 – was primarily on the back of high energy costs, a situation that has not repeated itself recently.

The long-term health of the Social Security program is at risk because of the sluggish economy. Wages, the main source of inflows in the Social Security system, have been stagnant for a decade, meaning that less money is coming in. A high unemployment rate means that a smaller proportion of the population is able to contribute a portion of their incomes into the system, and a retiree population that is living longer means that benefits have to cover more years. The number of workers per retiree, a predictor of the fundability of the pension system, has fallen from 16.5 (1950) to 2.9 (2010), with expected rates falling to 2.0 by 2056. The number of beneficiaries over the same time has increased from 2.93 million to 53.398 million, with an estimated 101 million in 2056.

The Bottom Line
Pushing the problems facing Social Security's funding to the next generation of taxpayers and lawmakers will only make matters worse. Baby Boomers want to know that the money they will rely on to pay future medical and living expenses will still be there in a decade, and taxpayers want to make sure that they aren't paying into a system that won't be able to provide them anything once they reach retirement age. Even if Americans would be better served by increasing their own personal savings and reducing the amount that they consume, changes in behavior will only go so far. (To learn more about investment options for Baby Boomers, read: Top 10 Investments For Baby Boomers. )

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