The Coronavirus Pandemic Will Wield Serious Effects on Social Security

The coronavirus pandemic is going to have some serious, long-term effects on Social Security’s solvency.

The U.S. trust fund that helps pay benefits to non-disabled Social Security beneficiaries is scheduled to run out of money in 2034, according to the latest Annual Report from the Trustees of Social Security released April 22. The date the trust fund is expected to run out of money is unchanged from the 2019 report.

About 76% of promised benefits will be payable from payroll tax receipts after the trust funds are exhausted.

In 2021, the total annual income of the program is expected to be less than the annual costs of the program for the first time since 1982. That gap is expected to continue for the next 75 years, which is the maximum period the trustees forecast.

But the estimates are based on a number of assumptions. Several key assumptions no longer are viable because of the recent sharp reduction in economic activity, which isn’t factored into the report. Now, the trust fund is likely to run out of money before 2034.

One thing not to worry about is the payroll tax deferrals permitted under the recent CARES Act. The law provides that Congress will make the Social Security system whole by providing money to the system to replace the payroll taxes.

There are at least two other key factors that will adversely affect the system.

The first is the rapid increase in unemployment. More than 26 million people have been added to the unemployment rolls in the last five weeks. The report assumed all of those people would be working now. Those currently unemployed, and their employers, were expected to be paying payroll taxes to Social Security that would be used to pay current benefits.

Those taxes aren’t going to be paid as long as those people are unemployed, and the lost taxes during their unemployment never will be made up.

In addition, it’s likely that a number of the people who have been laid off will decide that instead of seeking new work, they’ll apply for Social Security retirement benefits as soon as they are eligible.

They’ll be drawing benefits earlier than anticipated in the trustees’ report. There also might be an increase in claims for disability benefits by the unemployed who aren’t yet 62 and can’t draw retirement benefits yet.

Both of these factors mean the system will draw more money from the trust fund in 2020 than was estimated last year.

There are a couple of factors that will help the system a little. One morbid consequence is that some people are dying sooner than they would have, so they won’t be drawing retirement benefits for as many years as were estimated in the report.

The second factor is that the pandemic is deflationary. The inflation increases in benefits for at least a year or two probably will be lower than estimated.

The net effect, however, is Social Security will receive lower tax receipts than expected and pay more in benefits. It will draw more from the trust fund in 2020 than estimated.

This will deplete the trust fund two years earlier, according to a recent estimate from the Center for Retirement Research (CRR) at Boston College.

The same thing happened after previous steep recessions in 1982 and 2008.

I suspect a two-year decline in the trust fund’s life expectancy is optimistic. I think it will take longer to return to full economic activity than the CRR estimates, so the decline in payroll tax receipts will be more significant.

Congress might be forced, in the next few years, to make the changes in Social Security that it has been putting off for decades.

Money Market Funds Are Closing Again

We’re starting to see some secondary effects of the government responses to the pandemic.

In the last week, both Vanguard and Fidelity announced they are closing their treasury-only money market funds to new investors. Similar moves were made after the financial crisis when the Federal Reserve’s actions brought interest rates on short-term treasury debt near zero.

There are two reasons firms are closing their treasury-only money market funds and might eventually close others.

One reason is to delay the day when yields on the funds approach zero. When new money floods into a fund, the fund must buy new securities at current yields. Those yields are lower than yields on the securities already owned by the fund. The new yields lower the average yield paid by the fund to its shareholders.

The other reason is the fund companies don’t want to waive fees on the money market funds as they did for years after the financial crisis.

A fund’s fees are subtracted from interest received by the fund before determining the yield paid to shareholders. The fund companies don’t want to tell shareholders that they’re receiving no yield on their money or, even worse, that the fund company must reduce its principal to pay its fees.

So, when the yield approaches zero, large-fund companies usually waive their fees on money market funds. They want to delay that day for as long as possible.

For money you want to keep liquid and safe, consider money market funds that don’t restrict their holdings to treasury debt. That will incur some risk, but the major money fund sponsors should be able to evaluate companies’ finances well enough to avoid defaults.

You also can look at certificates of deposit (CDs). Most large brokers and mutual fund companies have services in which they arrange CDs through large banks that pay higher yields than your local banks.

The Pandemic Changes the Stock Indexes

The action within and between stock indexes since the March 23 bottom is more revealing than the overall moves of the indexes.

Stocks of the technology and growth companies increased their dominance over the rest of the market. While major sectors of the economy are closed, the digital economy largely flourishes.

The result is the Nasdaq 100 is doing far better than the S&P 500. The Invesco QQQ Trust (QQQ), representing the Nasdaq 100, is down only 0.56% for the year to date. The S&P 500 ETF (SPY) still is down 12.75% and has recovered only about 50% of its losses incurred through March 23. The QQQ declined less than SPY through the March 23 low.

Of the 20 largest positions in the QQQ, only three have negative returns for 2020. Leading the index higher have been JD.com (JD), Netflix (NFLX), Amazon.com (AMZN), Incyte (INCY) and Activision Blizzard (ATVI).

The recent trends merely continue a substantial outperformance by QQQ over the last 12 years.

I wouldn’t jump into the QQQ or these stocks now. The index and its largest stocks all are extremely overbought, according to technical indicators. Both AMZN and NFLX are up more than 40% in the last month.

There likely will be a buying opportunity in the coming weeks for those who stay patient.

The Data

There were 4.4 million new unemployment claims filed in the latest week. Since mid-March, more than 26 million new unemployment claims have been filed. Anecdotes indicate the numbers still might be low, because the volume of people seeking to file claims has been too much for online and telephone application systems to handle.

Benefit enhancements also are kicking in. The CARES Act provided that many contractors and self-employed can qualify for unemployment benefits. Some states only recently adapted their systems to handle applications from those workers. Also, 40 states now are paying the additional $600 in weekly unemployment benefits Congress provided.

There are anecdotal reports that some low-wage workers are asking to be laid off or are turning down offers to return to work, because the additional weekly unemployment benefits equal or exceed their usual wages.

Economists are estimating that when the April unemployment situation reports are issued, the unemployment rate will be 20% to 25%.

It is no surprise the economy is tumbling, according to the PMI Composite Mid-Month Flash Index. The survey found the manufacturing sector of the index declined to 36.9 from 49.2. The service sector of the index declined to 27.0 from 39.1. The composite for the economy declined to 27.4 from 40.5. Any reading below 50.0 indicates a contraction.

Existing home sales declined 8.5% in March, compared to a 6.5% increase in February. Over 12 months, sales were 0.8% higher.

New home sales did even worse in March, declining by 15.4% from February’s sales. Over 12 months, new home sales are down 9.5%.

The Leading Economic Indicators Index declined 6.7% in March compared to a 0.2% increase in February. The March decline is the highest in the 60-year history of the index and was broad-based.

The Federal Housing Finance Agency (FHFA) House Price Index increased 0.7% in February, compared to a 0.5% rise in January. For the past 12 months, the index climbed 5.7%.

The Markets

The S&P 500 rose 0.48% for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined 0.08%. The Russell 2000 increased 1.16%. The All-Country World Index (excluding U.S. stocks) added 1.09%. Emerging market equities gained 1.36%.

Long-term treasuries rose 0.81% for the week. Investment-grade bonds declined 1.02%. Treasury Inflation-Protected Securities (TIPS) fell 0.55%. High-yield bonds lost 2.06%.

In the currency arena, the U.S. dollar increased 0.96%.

Energy-based commodities lost 12.71%. Broader-based commodities fell 2.87%, while gold declined 0.55%.

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