In survey after survey, Social Security is cited as the primary source of income for millions of current and future retirees. As Social Security benefits are financed primarily by payroll taxes, the unprecedented spike in unemployment triggered by the coronavirus pandemic means the Social Security trust fund reserves will be depleted sooner than previously predicted, possibly by the end of this decade.
The annual report of the Social Security and Medicare Trustees released April 22 projects that the combined asset reserves of the retirement, survivor and disability programs will be depleted in 2035 — unchanged from the previous year’s report. The trustees’ predicted Social Security would be able to pay only 79% of projected benefits from ongoing payroll tax revenues in 2035, according to the report, resulting in a 21% across-the-board cut in benefits 15 years from now when today’s 52-year-olds reach their full retirement age and today’s youngest retirees turn 77.
But the trustees’ report did not reflect the potential impact of the COVID-19 pandemic.
Several organizations that closely monitor Social Security policy and funding issues warn the current recession will accelerate depletion of the trust funds, resulting in steep benefit cuts, a payroll tax hike or a combination of the two unless Congress steps in with a long-term funding solution.
The Bipartisan Policy Center, a Washington-based think tank that melds ideas from both the Republican and Democratic parties, estimates the combined Social Security trust funds could be depleted as early as 2029 if the impact of the current economic downturn is similar in duration and intensity to the one during the Great Recession.
A separate organization, the Committee for a Responsible Federal Government, whose board of directors consist of former members of Congress from both parties, as well as former Federal Reserve Board Chairman Janet Yellen, agrees.
“Once the current crisis passes, lawmakers will have only a few years to restore solvency to the program,” the committee said in its analysis of the latest Social Security trustees’ report. “Tax and spending adjustments will need to be phased in more abruptly than is desirable. The longer action is delayed, the fewer options will be available and the more painful changes will be.”
Robert Bixby, executive director of the Concord Coalition, an advocacy group that focuses on ending deficit spending and promoting a balanced budget, warned: “Ignoring the warnings in these reports will leave the public unprepared for changes that must inevitably be made to make these vital programs sustainable.”
Most of the money that Social Security pays out in retirement and disability benefits is from payroll taxes. Some additional income comes from the taxation of benefits and interest earned on securities held by the trust funds.
The costs of the Social Security program have exceeded its payroll tax revenue since 2010, forcing it to tap into interest income to pay benefits. Beginning next year, program costs will exceed total program income — including interest income — meaning Social Security will have to start drawing down trust fund reserves to pay full benefits. Once the trust funds are depleted, benefits would have to be cut by 21% across the board unless Congress steps in with a long-term financial solution.
A steep recession exacerbates the problem by decreasing current program revenue and increasing costs.
For example, a laid-off worker doesn’t pay payroll taxes and neither does his employer. If a retiree’s income declines, the amount of his Social Security benefits that are taxed could be reduced or even eliminated. And the Federal Reserve’s decision to cut interest rates will lower the yield on bonds held by the Social Security trust fund—all sources of income that fund benefits.
In addition, when many workers lose their jobs during a recession, claiming rates for Social Security disability insurance typically rise. Demographics also play a role as 10,000 baby boomers reach Social Security eligibility age each day. A wave of older workers who are forced to retire earlier than they had hoped would likely lead more to claim Social Security retirement benefits, raising costs in the short term.
Alicia Munnell, director of the Center for Retirement Research at Boston College, conceded that the pandemic has worsened the outlook for the Social Security trust in the short run, but said the long-term solutions remain the same: putting more money into the system or cutting benefits. There is no silver bullet.
“The pandemic has underscored the importance of Social Security as a critical and reliable source of support for retirees and those with disabilities,” Munnell wrote in her recent analysis of the Social Security trustees report. “The program faces a manageable financial shortfall over the next 75 years which — once COVID 19 is under control — should be addressed so that Americans will have confidence that the program will be able to pay the full amount of promised benefits.”
(Be sure to tune into Mary Beth Franklin’s webcast on the impact of the COVID-19 pandemic on Social Security claiming strategies on Thursday, May 7, at 2-3:30 p.m. ET. The webinar is eligible for 2 CE credits.)