It’s been four years since COVID-19 reared its ugly head, yet we’re still dealing with the damage it left behind. Since its start in 2020, the pandemic has thrown our economy into a frenzy, forcing the federal government to try to prevent a recession while combating inflation. This has led to a series of changes — some specifically targeting interest rates. Since 2022, the Federal Reserve has raised key interest rates nearly a dozen times, impacting things like the stock and housing markets. But how is it impacting federal programs like Social Security?
Generally speaking, lower interest rates seem like a good thing, especially when it comes to making big purchases like buying a new home or car, but that’s not the case for retirees who are relying on Social Security benefits or fixed-income securities for income. Here’s why: Lower interest rates lead to lower yields on fixed-income assets, which means the monthly payments retirees rely on will most likely be lower than expected. This could become a real problem for older adults who depend on this income to pay bills and buy groceries. But lower interest rates don’t just impact older adults — they affect Social Security’s finances, too.
Where interest rates come into play
We know that Social Security is funded in part through taxpayer dollars, but it also has two separate trust funds that are used to help pay recipients. Retirement and survivors benefits come from the Old-Age and Survivors Insurance (OSAI) Trust Fund. Similarly, the Disability Insurance (DI) Trust Fund pays those on disability. Social Security taxes and other income not being used to pay benefits in the current year are then deposited into these accounts.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Now here’s where the interest comes into play. By law, the funds in both trusts must be invested into special U.S. Treasury bonds guaranteed by the government. From there, market-rate interest is paid to the trust funds on bonds they hold. Once they’ve matured, or are needed to pay benefits, the Treasury redeems them. So, lower interest rates mean a lower amount of money is being deposited into the accounts. So, does this mean higher interest rates are better?
State of the economy plays a role
The answer to that question really depends on the state of the economy. High interest rates are good for Social Security’s trust funds because more interest can be generated, but if high interest rates are being implemented as a response to an overheated economy, as we’ve experienced in the past few years, the potential for a recession is there. A recession leads to job losses, meaning payroll tax revenue would decline, and it’s a domino effect from there.
While certain aspects of a recession, like job loss, may not directly impact a retiree’s Social Security check, the inflation caused as a result definitely will. This is just one of many reasons why it is so important to adequately plan for retirement. An estate, tax and financial planner can help you account for these fluctuations and present other alternatives to help supplement your income, ultimately giving you more financial control in your retirement.
Pat Simasko is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Simasko Law is a separate entity and not affiliated with CoreCap Advisors. The information provided here is not tax, investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Related Content
- How to Cut Your Taxes as Short-Term Interest Rates Come Down
- How to Ride the Waves of Interest Rates and Inflation
- All About Designating Beneficiaries in Estate Planning
- What's Going on with Social Security — and How Concerned Should You Be?
- Three Social Security Changes in 2024 to Know
-
Savings Goal CalculatorTools Want to know how much you need to save each month to reach your financial goals? Our calculator helps you build a realistic savings plan.
-
Cash vs. Mortgage: How to Pay for Your Second HomeShould you buy your second home outright or finance it with a loan? Weigh the pros, cons and tax implications before making the leap.
-
Gray Divorce Can Throw Your Retirement a Curveball: What to KnowIf you're entering retirement and going through a divorce at the same time, you've got some work to do to shore up your long-term financial security.
-
I'm a Real Estate Investing Expert: Optional 721 UPREIT DSTs Can Be the Best of Both WorldsBefore investing in any 721 UPREIT exchange, look for one that offers a straightforward, investor-friendly exit.
-
How an Expired Passport Thwarted Blackmail (and What Other Important Documents You Should Keep)An optometrist produced his expired passport to foil a blackmail attempt by the daughter of a former employee. After proving he was out of the country on the date of a forged diary entry, he took it a step further.
-
Optimize, Grow, Retain: The Power of Annual Client ReviewsFinancial advisers can use annual reviews to help enhance client outcomes, strengthen relationships and build their practice.
-
I'm a Real Estate Investing Pro: This Is What Investors Should Know About Truck Stop InvestmentsTruck stops might seem like good investments, but they can actually be a risky gamble due to unstable fuel prices, unreliable operators and coming changes in transportation. Instead, consider safer options like industrial or residential properties.
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary FormsStandard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
This Is How Life Insurance Can Fund Your Dreams NowBeyond a death benefit, life insurance can provide significant financial value and flexibility through 'living benefits' while you are still alive, helping with expenses like education, business ventures or retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
