Inflation has a negative effect on social security and pension funds

(KNSI) — The United States Social Security Administration on Thursday announced a historic cost-of-living adjustment for next year.

The COLA figure is supposed to move in line with inflation to ensure that older people and people with disabilities do not lose purchasing power over time. The 8.7% change was expected, but it is still much higher than what was assumed when the program’s financial base was determined just two years ago.

Saint Cloud State University economics professor King Banaian said previous estimates for insolvency are likely to be overly optimistic.

“In short, the Social Security Fund will become insolvent sooner than the figures already forecast.”

The agency’s latest estimate predicted that financial hardship would occur in 2033. If Congress does not make changes to avoid it, benefits are automatically reduced to 77 cents for every dollar previously pledged when insolvency is declared. .

Another factor working against the program is its reliance on payroll taxes. The labor force participation rate fell to historic lows in 2020 as economic shutdowns shuttered entire industries following the COVID-19 outbreak. While the labor market has recovered, the percentage of employed able-bodied Americans remains below pre-pandemic levels. The trust fund looks at a situation where fewer people contribute to a system that requires more money than previously estimated.

Banaian says other countries are in bigger traffic jams. He says the UK and elsewhere are eyeing a crisis.

“Many pension funds have seen these very low interest rates and have decided to continue investing on this basis, and can now be caught in a position like UK pension funds, where the rapid rise in interest rates causes them to lose money on the alternative investments they were using to maximize their returns.

Most defined benefit pension funds assume returns between five and eight percent when calculating the amount of funding needed to meet future obligations. With bonds anchored by central banks at zero percent or even negative yields, for years it was nearly impossible to achieve these targets without taking on substantial risk.

Banaian says he thinks US pension plans will fare better.


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