With just about everyone distracted by the COVID-19 pandemic, news about America's social safety net does not particularly garner any attention. Nonetheless, on April 22, 2020, the Bipartisan Policy Center released its latest analysis on the state of America's Social Security system and how the COVID-19 pandemic will negatively impact the plan's financial health.
Let's start by looking at the most recent analysis of the fiscal health of the nation's Social Security trust funds as found in this report:
As it stands now, the lion's share of the money paid out as both retirement and disability benefits from the Social Security system comes from payroll taxes with a small amount of income from the taxation of benefits and interest earned on securities held by the trust funds. Here is a table showing the payroll tax contribution rates for 2019:
According to the 2020 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, the OASDI program was paying benefits to 64 million people of which 48 million were retired workers, 6 million were survivors of deceased workers and 10 million disabled workers and their dependents. While the Old Age and Survivors Insurance or OASI and Disability Insurance or DI are generally expressed as a single entity, OASDI, in fact, by law, the two funds are separate entities meaning that combined fund operations and reserves are hypothetical. The total cost of the programs in 2019 was $1.059 trillion and total income was $1.062 trillion ($981 billion in non-interest income and $81 billion in interest earnings). At the end of fiscal 2019, the plan had asset reserves (in U.S. Treasuries) of $2.897 trillion. That said, under the Trustee's assumptions, Social Security's total cost is projected to be less than its total income in 2020 but higher than its total income in the years between 2021 and 2029. Social Security's costs have exceeded its non-interest income since 2010. According to the Trustee's calculations, the combined reserves of OASDI are projected to decrease from the current $2.897 trillion at the beginning of 2020 to $1.819 trillion at the end of 2029. According to the Trustees' analysis, by 2035, the OASDI combined reserves will be completely exhausted with OASI reserves being exhausted in 2034 and DI being exhausted in 2065. This could result in a significant cut in benefits.
Here is a graphic showing the declining cumulative value of the OASDI Trust Funds:
With that background, let's look at the analysis by the Bipartisan Policy Center. BPC notes that the following changes have taken place since the COVID-19 pandemic began:
1.) Laid off workers do not pay payroll taxes (and neither do their employers) into the Social Security system.
2.) Workers that have seen their hours cut may also result in depressed payroll tax revenue since Social Security recipients pay taxes on their benefits only if their incomes exceed $25,000 ($32,000 for a couple filing jointly). As well, retired beneficiaries have seen their interest income slashed thanks to the ultra-low interest rates adopted by the Federal Reserve in response to the COVID-19 pandemic, meaning that they will more likely find that their benefits will not be taxed.
3.) The aforementioned cut in interest rates by the Federal Reserve means that the Social Security trust funds will receive less interest income on the OASDI trust funds.
BPC analysts then look at what would happen to Social Security trust funds if (when) another recession takes place, using several variants of what happened during the Great Recession. Here are the key assumptions:
1.) Over the next 10 years, Social Security revenue and excess costs from additional claims of retirement and disability benefits change as they did over the ten years between 2008 and 2017.
2.) Adjustments were made for the added cost of higher numbers of older Americans claiming retirement benefits to reflect the growing number of Baby Boomer retirees since 2008.
3.) Since the CARES Act temporarily increased unemployment insurance payments, the analysis assumed that disability insurance claims may not rise by as much as they did during the Great Recession.
4.) Since the coronavirus is likely to result in the deaths of higher number of senior Americans who will stop receiving Social Security benefits, the analysis uses an estimate of the number of seniors who will no longer receive Social Security because they are deceased.
Here is a graphic showing the OASDI end-of-year Trust Fund balance for two scenarios; one without the impact of the COVID-19 pandemic (baseline scenario) and one including the impact of the COVID (i.e. another Great Recession):
Here is a similar graphic showing the OASI end-of-year Trust Fund balance:
As you can see, the BPC analysis shows the following:
In the absolute worst-case scenario with a recession twice as severe as the Great Recession, the DI reserves would be depleted in 2022 and the OASDI combined reserves would be depleted in 2026.
While we have no idea of the mid- and long-term impacts of the COVID-19 pandemic on the economy as a whole, at the very least, the prospect of a recession similar to that experienced in 2008 will result in the fiscal collapse of the Social Security Trust Fund. Unless Washington moves quickly to address this financial imbalance, Americans of all ages will find themselves impacted by higher taxes, dramatic decreases in government-funded retirement and disability benefits or some combination of the two. Thanks to the government's response to the COVID-19 pandemic, the pain is coming, it's just a matter of when.
Another fine example of an unintended consequence.
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