What will the Fed’s 2022 social security cut plans mean?
Social Security trust funds currently hold just over $ 2.8 trillion in assets, but those funds are expected to run out by 2034, which would cut benefits by nearly a quarter. One of the main reasons for the challenges of trust funds is the way they are designed. They only hold US Treasury debt, which currently pays the program a weighted interest rate of less than 2.4%.
When that interest rate is compared to the huge 5.9% increase in benefits per beneficiary Social Security has to pay this year due to inflation, it’s no wonder that trust funds are in trouble. . They simply cannot earn enough to meet the increases the program has to pay.
Still, some hope may very well be on the horizon. While the stock market has gotten a little nervous about the Federal Reserve’s plans to start scaling back its bond buying program, this news could very well mean good things for Social Security. Indeed, it could help both to increase the return on investment of Social Security and reduce the amount the program must pay out over time.
How tapering can help social security’s ROI
Because the Fed has the power to print legal tender, it has the ability to pay whatever price it chooses for the assets (usually bonds) it purchases. This is largely how it influences interest rates. If he wants to lower rates, he buys more bonds. If he wants rates to rise, he slows down or stops buying – that’s what “tapering” means – and he might even sell some of the bonds he owns.
When the Fed buys less, it means other people and institutions – those who cannot print legal tender – must step up efforts to buy the supply of bonds the Fed no longer buys. Given a consistency to supply of bonds, but lowered request for bonds given the Fed’s tapering decision, prices will naturally drop to a lower level. A lower price for a bond means the buyer gets a higher expected net return on that investment – in effect, higher interest rates.
Since social security can alone buy US Treasuries, higher interest rates mean that when he buys new bonds for his trust funds, he gets a higher return on his investment than he would with lower rates. This could potentially help extend the life of trust funds, but it won’t be that much. The reason is that now that Social Security trust funds should start to decline, Social Security will not be a net buyer of new bonds. Thus, it will not benefit as much as if it continued to build up its trust funds.
How tapering can help reduce social security spending
The biggest social security benefit of tapering comes from the impact tapering is expected to have on inflation. The Fed is shrinking to curb inflation. This can work because when interest rates go up it becomes more expensive to borrow money. As a result, the people and businesses who not have the option of printing legal tender must be more careful with the money they spend. This tends to make them more price sensitive, which can help keep inflation under control.
If the Fed manages to slow inflation to a more manageable pace through its decline, it may be a huge social security assistance. Indeed, social security must increase what it pays to its beneficiaries each year in the event of positive inflation, to help these beneficiaries to cover this inflation. The lower the inflation, the smaller the outflows from Social Security, which will allow its trust funds to last longer.
The Fed’s banging should help Social Security, but it won’t be enough
Since Social Security’s income could increase due to higher interest rates and its spending pressures could be reduced due to lower inflation, Social Security could be a big winner in the Fed’s cut. Even with this boost, however, it does not change the fundamental trajectory on which Social Security finds itself.
Even under more optimistic assumptions than its baseline scenario, Social Security’s modeling predicts a 95% probability that if nothing changes in its operation, its trust funds will drain by 2041. Although this indicates that it does There’s a chance his trust funds could last beyond the current 2034 baseline projection, he buys a few years at best before the benefits are likely to be reduced.
Regardless of when this happens, you need to recognize that there are really only a handful of tools Congress can use to protect Social Security in the long run. It can raise taxes, reduce benefits in a more controlled way than just leaving trust funds empty, or it can change the way those trust funds are invested. These three options involve a different set of tradeoffs and risks, and they will all impact most Americans as taxpayers, as recipients, or both.
So take the opportunity that you have now prepare the changes that will occur in Social Security in the not too distant future. Depending on the trajectory on which it is, it is not a question of if the program will change, it’s a matter of How? ‘Or’ What It will change. The better prepared you are in advance, the easier it will be to deal with these changes no matter what it ultimately looks like.
With a little over a decade before the trust funds are depleted, you still have time to put a plan in place for yourself, but the longer you wait, the more difficult the disruption will likely be. So get started now and be that much more prepared for whatever Social Security happens.