The coronavirus has not only spread widely around the world, but its impact has reached far and wide as well, leaving a lasting impact on many aspects of life, from how you shop and eat out to how you do your job. With so many people out of work, 36.5 million as of mid-May, the future of the economy is uncertain at best. It’s unlikely that coronavirus will just disappear and everyone will get their jobs back immediately; and the financial damage from the virus could reach into 2021 and beyond. One area that’s likely to see a huge blow because of the pandemic is the Social Security program.
The Big Problem
Currently, the Social Security program gets its funding from a 12.4% tax on all earnings up to $137,700. The payroll tax is where most of SS funding comes from; in 2019, $944.5 billion (89%) of total Old-Age, Survivors, and Disability Insurance income came from payroll taxes. Each year, there’s a gap between the cost and its income, which is where the SS trust fund kicks in and covers that gap. It’s well known that there’s a date of depletion of the trust, recently set at 2035, a mere 15 years from now. That doesn’t mean no money will be left in the Social Security program but rather that the trust fund is gone, which will mean that only 79% of benefits will be covered, and it’ll go down from there.
The big problem is that 36 million currently unemployed people aren’t paying payroll taxes into the system. A major chunk of its funding has been decimated.
If income, in the form of payroll taxes, is decreased for some time due to a poor economy, more money from the trust will have to be used to cover it, and it certainly won’t last until 2035. Add to that, the older workers who’ve lost jobs due to coronavirus closures are expected to start drawing benefits as soon as they’re eligible. Retirees can begin receiving benefits at age 62, but they’ll be penalized for not waiting until the current retirement age of 67 for those born in 1960 or later.
Another blow to the program is that retirement income is down. When you’re receiving benefits and still working, you pay taxes on income over $25,000 ($32,000 jointly). With so many people unemployed (including SS recipients), fewer taxes are being paid in, and this will likely continue if we go into a recession.
In addition, the SS trust funds that currently cover the gap, hold bonds, which means that when the interest rates are low, their yield is lower, so the fund isn’t earning money.
Of course, other issues are at play, not the least of which is the lack of personalized assistance. SSA has been closing some of its offices, making in-person assistance even more difficult. While many tasks can be done online through the SSA’s online portal, not all seniors have access to it at home, and many that do just aren’t tech-savvy enough to take advantage.
Another potential problem with the future of the social security program is the looming threat of no cost of living increase. The cost of living adjustment will be determined by comparing the 3rd quarter of 2019 to the 3rd quarter of 2020. If there isn’t an increase there, then you can expect no cost of living increase for 2021.
What Is Being Done?
There’s a push to get Congress to take action, but the solutions to help the Social Security program are unpopular because they can be deadly to political careers – raising taxes, cutting benefits, or raising the age of retirement even higher. However, there’s pressure for Congress to raise the cap of $137,700, and former VP Joe Biden has vowed to impose the tax on higher income to help fix the Social Security problem.
Unfortunately, the virus could have a lasting effect on unemployment rates across the country, perhaps sending the country into a recession. These kinds of huge reforms needed are slow to enact, and Congress may have to step in and intervene with emergency funding in the meantime.