As many of you probably know, our nation’s most famous social program faces its greatest challenge in its nearly 85-year history.
According to the report released annually by the Board of Trustees of Social Security, the program is facing a $ 16.8 billion funding gap between 2035 and 2094. This gap is the result of more than half a dozen ongoing demographic changes that are expected to Completely deplete Social Security asset reserves by 2035 and affect what could be a radical reduction in benefits for retired workers of up to 24%.
Of course, all this happened long before the 2019 coronavirus disease pandemic (COVID-19) was unleashed. The problem is that the physical and financial cost of COVID-19 only makes things worse for Social Security.
Image source: Getty Images.
As you can imagine, a high unemployment rate is bad news for a program that relies on payroll tax revenue of approximately 89% of the income raised. Additionally, record low returns mean less interest income for asset reserves of approximately $ 2.9 trillion from Social Security.
But there is much more here than meets the eye. Below are five surprising ways that COVID-19 is crushing Social Security’s long-term prospects and potentially reducing the amount of money older people will be able to take home.
1. COVID-19 limits salary growth
Although unemployment data presents a bleak picture, the much bigger problem for Social Security could be the low inflation environment that could persist for many years.
As noted, the 12.4% payroll tax on earned income, such as wages and salaries, is Social Security’s revenue-raising workhorse. He was responsible for $ 944.5 billion of the $ 1.06 billion raised in 2019. Generally speaking, the more money workers earn, up to $ 137,700 (the maximum taxable limit), the more income Social Security can generate.
However, a low inflation environment (i.e. one in which the price of goods and services increases slowly) suggests that employers will be less willing to pass substantial wage increases on to their workers. If wage growth slows, so will Social Security to collect additional payroll tax revenue in subsequent years.
Image source: Getty Images.
2. Can lead to lower initial benefits
While most people, including myself, have focused on the short-term dangers of a high unemployment rate and how it will affect Social Security income collection, they are overlooking the long-term impact of COVID. -19 in the initial benefits.
Since companies reduce hours or lay off workers in response to COVID-19, these actions could directly affect the initial benefits received by future retirees.
As a reminder, the Social Security Administration takes into account workers’ most profitable and inflation-adjusted 35 years when calculating their monthly benefit at full retirement age. In 2020, and perhaps 2021, it would not be surprising to see the earnings earned for many workers decrease due to unemployment, reduced hours, or reduced bonuses / commissions. In the long term, this reduced earning capacity in 2020 and / or 2021 could lead to a lower initial Social Security benefit for retired workers.
Image source: Getty Images.
3. A reduced or non-existent COLA, which leads to a loss of purchasing power
Another problem caused by the coronavirus pandemic is that it could exacerbate the loss of purchasing power associated with Social Security earnings.
While I have covered in depth how the Social Security Administration calculates Cost of Living Adjustments (COLA) each year, the key point to keep in mind is that COLA depends on changes in the program’s inflationary belt, the Price to the Consumer Index of urban employees and administrative workers (CPI-W). The CPI-W has more than half a dozen major spending categories, and several of those categories are showing signs of deflation (i.e. falling prices).
According to inflation data from the US Bureau of Labor Statistics, the CPI-W decreased 0.1% over a 12-month period, through May 2020. In addition, the Consumer Price Index for all urban consumers (CPI-U), similar The inflation measure of the CPI-W showed significant deflation in energy, clothing and transportation services on an unadjusted 12-month basis, through May.
Simply put, COVID-19 is crushing current beneficiaries’ hopes of receiving a COLA in 2021. Without a COLA next year, the purchasing power of Social Security earnings will likely decrease as healthcare inflation continues being tall.
Image source: Getty Images.
4. Low net legal immigration
The COVID-19 pandemic has also caused governments around the world to adjust their, even temporary, immigration policies. In the United States, President Trump issued an executive order that stopped green cards for new immigrants, as well as certain temporary work visas, until the end of 2020.
What you may not realize is that immigration plays a key role in preserving the financial health of the Social Security program. The Trustees’ annual report notes that the program has a steady stream of net legal migration to the United States to help offset the number of people leaving the workforce. Since many of these legal immigrants are young, they will spend decades in the workforce generating payroll tax income for Social Security before they ever get a retirement benefit of their own.
The precautions being taken to prevent the spread of COVID-19 by substantially reducing net legal immigration could ultimately reduce the worker-beneficiary ratio and make it significantly more costly to fix the Social Security funding gap.
Image source: Getty Images.
5. A record low birth rate
Finally, most people are probably overlooking how COVID-19 is going to affect birth rates.
On the surface, you might think that being stuck at home for months or weeks with your partner might be the perfect recipe for creating baby boom 2.0. But that is not the case. The economic disruption caused by the coronavirus pandemic is unlike anything we’ve seen in nearly 90 years, and that’s more than enough for couples to reconsider having children.
Even before the COVID-19 pandemic, birth rates in the United States were at their lowest point. Beyond economic and financial concerns, access to contraceptives has improved, marriages are lagging, and fewer couples have unplanned pregnancies.
The problem for Social Security is that a certain level of birth rate is needed to guarantee the stability of the worker-beneficiary relationship. If birth rates remain persistently low, there won’t be enough new workers to replace retirees in, say, 20 years.
The coronavirus pandemic is doing quite a number in the Social Security program, and it would not be at all surprising if the timeline of asset reserve depletion or shortfall in funding obligations have worsened significantly when the next Trustees report is released in 2021.
