Social Security Trust Fund Meets Covid-19

Social Security Trust Fund Meets Covid-19

September 08, 2021

Ask anyone; they can quickly tell you how COVID-19 has personally impacted them. You probably don’t need me to tell you that the COVID pandemic has far-reaching impacts on the economy too. From the early stories of toilet paper shortages and forced unemployment to the longer-lasting consequences, including labor shortages and disruptions to the supply chain, COVID has brought havoc.

The US Treasury Department recently released new projections for the future of the Social Security trust fund. Before the pandemic, the fund looked in bad shape.  After the pandemic, it’s even worse.  The latest forecast suggests the fund will run out of money yet another year sooner.

The Basics

Social security is primarily a pay-as-you-go program meaning that most of the payroll taxes received from today’s workers’ pay benefits for the millions of people currently collecting benefits. Basically, it’s a government run pyramid scheme.  However, Social Security is presently drawing down its assets to pay retirees the benefits promised due to the demographics. In other words, monthly payments exceed the social security payroll taxes coming in plus the interest earned on the trust fund, leaving the annual accounting for social security in the negative.

This shouldn’t come as a shock; for years, the administration’s annual report has projected that Social Security is not sustainable over the long term at current benefit and tax rates. We’ve known that the number of retired workers will rapidly grow as the baby boomers continue to retire.

Of course, the projections never anticipated the COVID 19 pandemic and the 2020 recession that would create further impacts. Sure, the death toll, concentrated among older Americans, did reduce future social security benefit payouts but not nearly enough to offset the profound revenue loss from payroll taxes or the drop in birthrates and immigration. Add longevity and rising health care costs, and the situation looks grim.

The New Estimates

Based on estimates from 2021 reports, the trust fund will pay scheduled benefits on a timely basis until 2033. The funds and reserves will become depleted at that time, and continuing tax income will be sufficient to pay only 76% of scheduled benefits.  

Not only are old-age social security benefits in jeopardy, but disability benefits are too. 

According to the report, the Disability Trust fund will be able to pay scheduled benefits until 2057. That’s eight years earlier than in last year’s annual report. 

The fund’s reserves will become depleted at that time, and continuing tax income will be sufficient to pay 91% of scheduled benefits.  

While old age and disability benefits are separate under law, the report presents information that combines the reserves to provide the status of the social security program. Hypothetically, a combination of all the programs reserves, both the old age and disability trust fund, is estimated to be depleted by 2034.

What to Expect

No matter how you look at it, individually or combined, without action from the government, social security is on its way to becoming insolvent.

The average old-age social security benefit is currently $1,543 a month, dropping to 76%, leaves the average benefit at $1,173 a month. Certainly not enough to live on, especially with the current inflation costs. That could be a bleak outlook for the 65 million people currently collecting benefits. A significant drop like that could be devastating. While the political spin will create panic and fear, I believe it is unlikely that the government would reduce the benefits already being paid. At any rate, before 2034, the program will have to endure changes.  

You may remember back in the ’80s, the government’s attempt to shore up the program gradually pushed back the full retirement age from age 65 to age 67. New legislation could consider moving full retirement benefits even further.

More likely, we will see changes in the form of increased social security taxation. President Joe Biden campaigned on the idea of higher taxation for wealthy Americans by expanding the wages subject to the social security tax, rather than maxing out once earnings reached $142,800 as they are now. Past recommendations have even considered an overall increase in social security tax withholding, 1% additional paid by the employee and 1% additional paid by the employer.  That may not be out of the question.

Labor Secretary Marty Walsh has said that the Biden-Harris administration is committed to building back better, not just roads and bridges, but also the promise of a secure retirement. Forgive me if I’m not comforted; our government leadership has been aware of the looming depletion and annual projections for years.

We will see how quickly Congress comes together with an agreed-upon plan. Keep in mind the democrats have a narrow majority.  Advancing legislation without Republican support is difficult.  The fact that the right and the left have difficulty in coming together, cloud the prospects of seeing modifications during the Biden administration

Plan Ahead

We do believe (hope) that there will be changes to shore up social security before it becomes insolvent.  That said, it would be foolish to plan to rely on Social Security alone. It’s important to save on your own and take personal responsibility in planning for the future you want.  Let us know if we can help.

This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website.  River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.