It’s no secret. Social Security is in trouble. It’s been talked about by the American public for years and ignored by politicians who keep kicking the can down the road. For at least 20 years, statements similar to this one from 1981 have appeared on every annual Social Security statement:
Your benefit figures shown here are only estimates based
on current law. The laws governing benefit amounts may
change because, by 2038, the payroll taxes collected will be
enough to pay only about 73 percent of benefits owed.
The conclusion to the 2019 annual Social Security Board of Trustees report said, “Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare. Lawmakers should address these financial challenges as soon as possible. Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare.”
The latest annual board of trustees report was issued in April 2020 using data through the end of 2019. The report’s calculations included economic fluctuations but did not take into consideration any severe economic downturns, like the one caused by the Coronavirus. The Board of Trustees has substantially revised its forecast and now projects that the trust fund will run out of money in 2033, two years earlier than previously expected.
Shortly after the board’s report in April, the Center for Retirement Research (CRR) at Boston College ran its own analysis, reaching the same conclusion that the Social Security Trust Fund would run out of money in 2033.
The Penn Wharton School of the University of Pennsylvania also predicts that the Social Security Trust Fund will run out of money in 2032 or 2033 depending on the type of economic recovery the U.S. experiences.
At the depths of the economic downturn, more than 22 million people were added to the unemployment rolls. The 2020 Social Security Board of Trustees report assumed all those people would be working now and they and their employers would be paying into the Social Security system.
The report did not include the possibility that some people who have been laid off will apply for Social Security benefits as soon as they’re eligible rather than go back to work, thus taking more money out of the Social Security system.
Nor were there assumptions that there may be an increase in the number of disability claims by unemployed who aren’t yet 62 and ineligible to receive Social Security benefits.
On the other side of the coin, though, the Covid pandemic is deflationary. Social Security recipients usually receive an annual cost-of-living adjustment (COLA). It’s expected that those COLAs will be smaller for the next year or two, meaning less money coming out of the trust fund.
The net effect is that Social Security will take in less money and pay out more benefits, causing a larger draw against the trust fund in 2020.
In spite of the doom and gloom, Social Security is probably not going out of business. As long as people are working, money will be paid into the Social Security system and then paid out to Social Security recipients. The board of Trustees estimates that funds coming in will be sufficient to pay 75% to 80% of promised benefits for at least 75 years.
And it’s likely, people who are already retired, and those within 5-10 years of retirement, will be grandfathered in by Congress. The only exception may be high-income Social Security recipients. Those more than 10 years from claiming benefits should include the possibility of higher Social Security payroll taxes and lower Social Security benefits in their long-range retirement planning.