ohmore than 50 million Americans currently depend on Social Security for at least part of their retirement income. When you also consider that approximately 180 million people have contributed to the system as a whole, it’s clear that Social Security serves as the foundation for many Americans’ retirement plans.

Despite the key role it plays, the future of Social Security is anything but certain. For example, Treasury Secretary Janet Yellen said her payments were at risk if the debt ceiling was not raised earlier this year. Additionally, program administrators warn that Social Security payments will be be reduced by 2034 if Congress does not act to consolidate its finances. With that risky future in mind, here’s what to expect from Social Security in 2022.

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# 1: Payments Will Increase 5.9%, But That Won’t Cover Inflation

Due to its cost of living adjustment, current social security beneficiaries will see their raw benefits increase by 5.9% in 2022. Although this is the highest adjustment in decades, it will actually not be enough to keep up with the headline inflation we faced in 2021 According to the Bureau of Labor Statistics, the general consumer price index rose 6.8% in the 12 months through November 2021.

As if he was hanging out inflation were not enough of a problem, many Social Security recipients will not see all of this increase in their report benefit checks. Medicare Part B premiums increase by more than 14%, from $ 148.50 per month to $ 170.10 per month. People who are affiliated with both Social Security and Medicare have their Part B premiums paid directly from their Social Security benefits. As a result, these people are likely to see less increase in the amount of their bottom line than they thought.

# 2: taxes on high income earners will rise to help fund the program

In 2022, the salary base on which social security contributions are deducted will drop from $ 142,800 to $ 147,000. This exposes an additional income of $ 4,200 to the 12.4% Social Security tax rate (half paid by employees, half paid by employers). This adds up to $ 520.80 per employee in tax burden for people with high enough incomes.

N ° 3: The program’s trust funds will move closer to emptying

Despite this higher tax burden to fund the program, simply because of the one-year schedule ahead, the date on which Social Security trust funds are expected to be emptied will get closer. After all, 2034 is only 12 years from 2022, while it is 13 years from 2021.

In addition to the passing of time, there is good reason to believe that inflation will put additional pressure on Social Security trust funds, potentially bringing this day counts even earlier. This is because Social Security trust funds are invested exclusively in US Treasury bills. These bonds only return around 2.4%, which is far from keeping pace with current inflation.

When predicting that the trust funds would last until 2034, Social Security trustees assumed an inflation rate of 2.4%. With payments in 2022 increasing 5.9% – more than double the assumed inflation rate – and trust funds unable to earn enough to keep up, this adds substantial risk to the longevity of trust funds.

# 4: Congress will bicker – and probably do not do anything to strengthen social security

Social Security has gained a reputation as the “third rail of American policy”. It borrows that name from electrified rail tracks – where touching the third electricity-carrying rail could potentially kill a person (or in Social Security’s case, a person’s political career).

Unfortunately, this reputation means that neither side wants to seriously push forward with program reforms until trust funds are so close to being drained that they have, realistically, not been lost. other choice. The last major social security reform, for example, took place in 1983, just before the trust funds were to be emptied the last time.

After all, there are really only three things Social Security can realistically do: raise taxes, lower benefits, or change the way money is invested in pursuit of a potential better return. If one side proposes to raise taxes, the other will call it ‘killing jobs’. If one party proposes to cut benefits, the other will call her “hungry grandmother”. If one party offers to seek a better return, the other will call it “a gift to Wall Street” or “Social Security bet in the stock market casino.”

This fierce pullback on all reform proposals – even those recommended with the best intentions – is what makes Congress unlikely to do anything until draining trust funds force their hand. . It’s just too easy to score points against any change because of the “third rail” status Social Security has achieved.

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 until 2022, but the program’s structural challenges are reaching a point that they are hard to ignore. While Congress is unlikely to act to solidify the program in 2022, you can (and should) take steps to solidify your own financial situation in 2022, so that you are ready when the inevitable changes occur.

If taxes increase in the future to support the program, it will be easier to reduce your savings than to reduce your lifestyle to handle the increase in taxes you will pay. On the other hand, if benefits are reduced in the future to shore up the program, it will be easier to spend a nest egg than to cut back on your retirement lifestyle. And if Social Security is invested differently, you’ll need a bigger nest egg to handle the higher uncertainties that come with the potential for bigger long-term returns.

As a result, whatever the ultimate Social Security fix, all signs are that you will be better off if you make 2022 the year you prepare your own financial house for the future of the program. Start saving and investing what you can now, so that when the changes happen, you will be better prepared to deal with them. The sooner you start, 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.

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