The Pandemic Reduces Social Security’s Solvency and Some Benefits

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

The 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. That date is unchanged from the 2019 report. In 2021, the total annual income of the program is expected to be less than the annual costs for the first time since 1982. Beginning in 2021, the trust fund will begin to be spent down. After the trust fund is exhausted, about 76% of promised benefits will be payable from payroll taxes annually 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 following the coronavirus pandemic. The report is based on data through 2019, so the coronavirus pandemic isn’t factored into the report. One thing not to worry about is the payroll tax deferrals and exemptions permitted to employers 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 effects of the pandemic that will adversely affect the system.The first is the rapid increase in unemployment. More than 30 million people were added to the unemployment rolls in six weeks. The total number of new claims during the pandemic so far is 36.5 million and likely will grow.

The trustees’ report assumed all those people would be working in 2020. They and their employers would be paying taxes to Social Security that would be used to pay current benefits. Those taxes are not going to be paid if those people are unemployed, and the lost taxes during their unemployment never will be made up.The second factor is that a number of the people who have been laid off likely will decide that instead of seeking new work, they will 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. These factors mean the system will draw more money from the trust fund in 2020 than the trustees estimated.

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 estimated in the report.The second factor is that the pandemic is deflationary.

The cost of living increases in benefits will be lower than estimated for probably at least a year or two.The net effect is Social Security will receive lower tax receipts than expect-ed and pay more in benefits. It will draw more from the trust fund in 2020 and perhaps longer.The effects of the pandemic will deplete the trust fund two years earlier than in the latest trustees’ report, according to a recent estimate from the Center for Retirement Research (CRR) at Boston College.

The same thing happened after the financial crisis. I suspect a two-year decline in the trust fund’s life expectancy is optimistic. The trustees’ report does include recessions in its long-term forecast. But I think this downturn will be steeper than many estimated, and it will take longer for us to return to full economic activity. It could be years before GDP returns to its previous peak. If that turns out to be correct, the downturn in payroll tax receipts will be larger and last longer than anticipated.Additional factors also are hurting the system. One key factor is inter-est rates will be lower persistently.

In pension calculations like this, lower interest rates result in a projection of higher future deficits.Low inflation is another import-ant factor. Low inflation means wage increases are likely to be lower than forecast, and that’s likely to reduce future tax revenue.Congress might be forced in the next few years to make the changes in Social Security that it has been putting off for decades.

In the past, I have said that people in or near retirement (probably age 55 and older) are not likely to be affected by changes. Exceptions could be those with higher incomes and assets. Most of the burden of changes in the pro-gram will be on younger workers.What’s little understood is that the downturn in the economy is going to reduce permanently the benefits of some near-retirees, even without any changes by Congress.

The high level of unemployment in 2020 is likely to cause a reduction in average earnings in the workforce for the year. I won’t get into the technical details, but final Social Security benefits are heavily influenced by the inflation in average hourly earnings from the start of your career through age 60. Your lifetime earnings are indexed for the inflation in economy-wide earnings before your benefits are computed. Unfortunately, those who were born in 1960 (and turn 60 in 2020) are likely to be hurt by this year’s downturn.

Their final benefits are likely to be lower than they would have been with a normal year of average earnings. One unofficial estimate I’ve seen projects that for those born in 1960, a 6% decline in average earnings in 2020 will cause a 5% decline in individual benefit levels. Those born after 1960 also are likely to see lower first-year benefits if average earnings don’t recover. Current retirees could be affected in a different way. The hibernation economy in 2020 also is likely to keep the Consumer Price Index (CPI) low for the year.

The CPI might even decline. That means little or no cost of living increase (COLA) in Social Security benefits in 2021 for those already receiving them. Little or no COLA could affect the Medicare Part B premiums you pay. There’s a “hold harmless” provision in Social Security. When Medicare Part B premiums are withheld from Social Security benefits, the dollar increase in Medicare premiums can’t cause a reduction in net monthly Social Security benefits.

So, if there is little or no Social Security COLA and there’s an increase in Part B Medicare premiums, Medicare won’t be able to collect the premium increases from Social Security beneficiaries who have their premiums withheld from Social Security benefits. Instead, the Medicare beneficiaries who don’t have their premiums deducted from Social Security benefits will bear the full cost of the Medicare cost increase. About 70% of Medicare beneficiaries have their premiums withheld from Social Security benefits, so the other 30% would bear the entire cost increase.

Those most likely to be hurt are first-time Medicare beneficiaries and those between ages 65 and 70 who signed up for Medicare as required at age 65 but are delaying Social Security retirement benefits until a later age to increase the benefit level. These people are at risk of seeing a substantial Medicare Part B premium increase in 2021 because of the 70% of Medicare enrollees protect-ed by the hold harmless provision. This sequence of events happened in 2016.

Congress stepped in with a plan to prevent a steep premium increase on a minority of Medicare beneficiaries. Congress also lent money to the Medicare trust fund. All Medicare beneficiaries are paying it back over time through a Medicare premium surcharge.

We might see the same thing happen again very soon. As the picture becomes clearer than it is now, I’ll be updating you on the effects the coronavirus pandemic is having on your current and future Social Security benefits.