Much has been written about the short-term impact of the coronavirus on the economy, but the pandemic (as well as the policy responses to it) will also have long-term consequences for the federal budget and economy, including Social Security. In today's blog post, I've highlighted at least 3 ways that your social security benefits may be impacted by the COVID-19 pandemic.
Faster depletion of the SS Trust Fund
The Social Security Trust Fund is supported in several ways: primarily by revenue derived from FICA taxes, and similar to our own investments, through interest income earned on the US Treasury bonds held by the fund. The loss of more than 30 million jobs since the pandemic started means a reduction in payroll tax revenue. The longer the US unemployment rate stays elevated, the greater the financial impact on the fund. Adding to the problem is the government’s response to the pandemic including an unprecedented cut to interest rates. As we’re experiencing this decrease in revenue, we’re likely to see an increase in benefit payments as workers close to retirement age are laid off and choose to file for social security benefits rather than reenter the workforce.
While the fund usually receives enough income from FICA taxes to pay Social Security benefits for retired workers each year, tax revenue is expected to fall short of the amount needed to pay retiree's benefits for the first time in 2021. Going forward, the shortfall was to be paid from reserves from the fund. According to the 2020 annual report of the Social Security Trustees[1], these reserves will be depleted, and the trust fund will run out of money in the year 2034. These estimates were published in April and did not take into account the economic impact of COVID-19. In fact, The Wharton School of the University of Pennsylvania published a report in late May[2] that the SS trust fund could be drained as much as four years earlier than expected because of the financial impact of coronavirus on the funding sources of the social security program. “Incorporating the economic and health consequences of the COVID-19 pandemic will likely lower payroll tax revenue, increase disability claims, accelerate collection of early retirement benefits, and reduce the interest accumulating on trust fund reserves,” according to the committee. These factors “will almost certainly” speed up the insolvency, the analysis of the report concludes.
Smaller COLA in 2021
Social security uses an inflation index known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to determine its cost of living increases for retirees each year. The index measures the change in prices of a predetermined basket of goods and services from one year to the next. There are numerous spending categories that factor into the CPI-W. Prior to the onset of the coronavirus there had been a modest increase in prices in shelter, medical care, and food costs. As the economic impact of the pandemic was felt, inflation in most goods and services has been non-existent. Meanwhile, crude oil demand has plunged, causing energy prices to plummet. A review of the year over year data for March and April shows little to no increase in inflation according to the Bureau of Labor Statistics. This leads us to believe the Cost of Living Adjustment for 2020 may likely be zero. Considerably weaker energy prices, coupled with stagnant prices, increase the chance retirees won't see much of an increase in their benefit checks next year.
Less in-person assistance from SS employees
Exacerbating all of the above issues is the fact that Social security has shut its offices, sending 60,000 workers home. If you are retiring soon and filing for SS or Medicare it's going to be more difficult to get the help you need. In-person service is by appointment only and for limited, dire need situations. Walk-in meetings are no longer allowed. In addition, the administration’s toll-free number (800-772-1213) has been understaffed for years due to severe agency budget cuts, increasing call wait times and frustrating retirees. Social Security Administrator Andrew Saul admitted as much in February 2020, telling AARP that “We have some challenges, as everybody knows, in delivering the proper service to our customers. The 800 number, that has been a major problem, major concern for all our customers." Some of our clients have reported wait times of 30 to 40 minutes. The Agency recommends utilizing their online services to get answers to commonly asked questions and handle routine requests such as applying for benefits, checking the status of an application or appeal, requesting a replacement Social Security card, printing a benefit verification letter, and more. (Find a list of all available online services at Online Services | SSA.)
If this all feels like scary news, remember that most of these shortfall predictions are still fifteen years away. The quicker we see an economic bounceback from the doldrums of COVID-19, the less impact these factors will have. While changes to the program are inevitable, an improvement in economic conditions may allow Congress to kick the can down the road a bit longer. Ultimately, the best way to navigate the variability of retirement is to ensure we have a comprehensive financial plan in place that can adapt to the types of changes that may be coming. Uncertainty creates fear and anxiety, so doing what we can to stay informed and controlling what we can control may be a good first step. To that end, we’ll continue to work to provide thoughtful and informative articles through our blog to help you in your journey through retirement.
[1] Social Security Administration (2020, April 22) “Analysis of the 2020 Social Security Trustees’ Report” http://www.crfb.org/papers/analysis-2020-social-security-trustees-report
[2] Penn Wharton (2020, May 28) “The Impact of the Coronavirus Pandemic on Social Security’s Finances” https://budgetmodel.wharton.upenn.edu/issues/2020/5/28/social-security-finances-coronavirus