Social Security’s finances depend largely on payroll taxes, tying the strength of Social Security to the strength of the U.S. economy. The U.S. unemployment rate was more than 13.3% through May. That was worse than the 2009 Great Recession, when the unemployment rate reached a peak of 10.6% in January 2010. With 20.5 million people out of work, combined with a higher number of new claims for benefits as older unemployed workers turn to Social Security, there will be a significant impact on the finances of the Social Security Trust Funds. The degree of the impact depends on how long it takes to get our economy safely up and running again.
The Social Security’s Trustees annual report, which was prepared before the onset of COVID-19 and subsequent shut down of the economy, forecasts that the Social Security trust funds will be depleted by 2035. But a number of Social Security experts are beginning to warn that the program could run low much sooner, by as early as the end of this decade.
Most of the money that Social Security pays out to current beneficiaries comes from payroll taxes. According to the Social Security Trustees, the program received $805.1 billion in payroll taxes in 2019. Social Security also received an estimated $38.9 billion from the taxation of Social Security benefits, and $77.9 billion in interest was earned on special issue non-marketable bonds (I.O.U.s) held by the trust fund last year.
The Bipartisan Policy Center (BPC) points out in a recent blog, that each of these sources of revenues is negatively impacted by high unemployment. When people are out of work, no payroll taxes are withheld from earnings. A portion of Social Security benefits is taxable when a Social Security recipient has an income higher than $25,000 (individual) or $32,000 for a couple filing jointly. But the coronavirus recession has impacted both earnings from jobs and the value of retirement accounts, so that fewer retirees will meet the income thresholds that make their benefits taxable this year. Finally, the Federal Reserve has responded to the recession by cutting interest rates, which means that the yields on the bonds held by the Social Security Trust Funds are smaller and will provide lower interest income. A recession also causes a higher number of new claims when older workers are forced to retire earlier than planned, raising costs in the short term.
The BPC notes that this combination of lower revenues and higher program costs will shorten the solvency of the Social Security. Its blog points to past changes in Social Security solvency. In 2008, prior to the full impact of the Great Recession, Social Security Trustees estimated the Trust Fund would be depleted in 2041. By the time the recession had run its course, in 2012 high unemployment and sluggish economic growth had moved up the insolvency date to 2033.
The BPC released its own estimate of the impacts of a coronavirus recession on Social Security, projecting that it would accelerate the depletion of the trust fund from 2035 (projected in this year’s trustee report) to 2029. Without any changes, a depletion of the Social Security trust fund would trigger program wide benefit cuts of 23%, as benefits adjust to the level of revenues still received by the program.
TSCL strongly believes that inaction on addressing Social Security’s financing challenges is putting the benefits of tens of millions at risk. The closer we come to the Social Security depletion dates, the more difficult it will be to find a solution to strengthen program finances. With the coronavirus recession, the depletion date may arrive sooner than anyone ever expected.
Sources: 2020 Social Security Trustees Report, April 22, 2020. “COVID-19 May Deplete Social Security Trust Funds This Decade,” Nicko Gladstone, Shai Akabas, Bipartisan Policy Center, April 22, 2020.