4 Problems You Could Face if You Don’t Save Enough for Retirement
It's recommended that everyone saves for retirement throughout their career. Find out how your retirement could be affected if you don't save enough.
Over 50 million Americans currently rely on Social Security for at least a portion of their retirement income. When you also consider that around 180 million have paid into the system overall, it’s clear that Social Security serves as the foundation of many Americans’ retirement plans.
Despite the key role that it plays, Social Security’s future is anything but certain. For instance, Treasury Secretary Janet Yellen indicated its payments were at risk if the debt ceiling didn’t get raised earlier this year. In addition, the program’s Trustees warn that Social Security’s payments will be slashed by 2034 if Congress doesn’t act to shore up its finances. With that at-risk future in mind, here’s what to expect from Social Security in 2022.
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No. 1: Payments will increase by 5.9% — but it won’t cover inflation
Due to its annual cost-of-living adjustment, existing Social Security recipients will see their gross benefits increase by 5.9% in 2022. Although this is the highest adjustment in decades, it won’t actually be enough to keep up with the overall inflation we faced in 2021. According to the Bureau of Labor Statistics, the general Consumer Price Index increased by 6.8% in the 12 months through November 2021.
As if trailing inflation weren’t enough of a problem, many Social Security recipients won’t see all that increase in their net benefit checks. Medicare Part B premiums are increasing by more than 14%, to $170.10 per month from $148.50 per month. People who are signed up for both Social Security and Medicare have their Part B premiums paid directly from their Social Security benefit. As a result, those folks will likely see less of an increase in their take-home benefit amount than they might expect.
No. 2: Taxes on higher-income earners will go up to help fund the program
In 2022, the wage base on which Social Security taxes are levied will increase from $142,800 to $147,000. That exposes an additional $4,200 of income to Social Security’s 12.4% tax rate (half paid by employees, half paid by employers). That adds as much as $520.80 per employee in tax burden for people whose incomes are high enough.
No. 3: The program’s trust funds will tick closer to emptying
Despite that higher tax burden to fund the program, simply by virtue of the calendar advancing a year, the date that Social Security’s trust funds are projected to empty will get closer. After all, 2034 is only 12 years away from 2022, while it’s 13 years away from 2021.
In addition to the passage of time, there’s good reason to believe that inflation will put additional pressure on Social Security’s trust funds, potentially bringing that day of reckoning even sooner. This is because Social Security’s trust funds are invested exclusively in U.S. Treasuries. Those bonds are earning only around 2.4%, which doesn’t come anywhere close to keeping up with current inflation.
When they projected the trust funds would last until 2034, Social Security’s trustees assumed an inflation rate of 2.4%. With the 2022 payments increasing by 5.9% — more than twice that assumed inflation rate — and the trust funds unable to earn enough to keep up, it adds substantial risk to the trust funds’ longevity.
No. 4: Congress will bicker — and likely do nothing to shore up Social Security
Social Security has earned a reputation as the “third rail of American politics.” It borrows that name from electrified train tracks — where touching the electricity-carrying third rail could potentially kill a person (or in Social Security’s case, a person’s political career).
Unfortunately, that reputation means that neither side wants to seriously advance reforms to the program until the trust funds are so close to emptying that they realistically have no other choice. The last major Social Security reform, for instance, took place in 1983, just before the trust funds were expected to empty the last time.
After all, there are really only three things Social Security can realistically do: raise taxes, reduce benefits, or change the way the money is invested in pursuit of a better potential return. If one side proposes raising taxes, the other side will call it “killing jobs.” If one side proposes cutting benefits, the other side will call it “starving grandma.” If one side proposes seeking a better return, the other side will call it “a giveaway to Wall Street” or “betting Social Security in the stock market casino.”
That fierce pushback on any reform proposals — even ones recommended with the best of intentions — is what makes it unlikely that Congress will do anything until the emptying trust funds force their hands. It’s simply too easy to score points in opposition to any changes due to the “third rail” status that Social Security has earned.
What you can do about it in 2022
With that backdrop in place, it becomes clear that Social Security will be with us largely intact through 2022, but the program’s structural challenges are reaching the point that they’re tough to ignore. Although Congress is unlikely to act to shore up the program in 2022, you can (and should) take steps to shore up your own financial condition in 2022, so that you’re prepared when the inevitable changes hit.
If taxes go up in the future to shore up the program, it’ll be easier to cut back savings than to cut back on your lifestyle to handle the increased taxes you’ll pay. On the flip side, if benefits get cut in the future to shore up the program, it’ll be easier to spend down a nest egg than to cut your retirement lifestyle. And if Social Security gets invested differently, you’ll want a larger nest egg to manage the higher uncertainties that come with the potential for greater long-run returns.
As a result, no matter what the ultimate solution is for Social Security, all signs point to you being better off if you make 2022 the year you prepare your own financial house for the program’s future. Start saving and investing what you can now, so that when the changes come, you’ll be better prepared to deal with them. The sooner you get started, the easier the transition will be, so make it a priority for yourself as we head into the new year.
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Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
