You’ve probably heard that Social Security, a major source of many Americans’ retirement income, soon will be on hard times.
True enough. Social Security experts previously have said they expect the program’s trust fund for retirement benefits to be exhausted by 2034 unless the government acts to shore it up.
Now, the story has grown worse: Two nonprofit institutions recently issued new reports showing that the coronavirus pandemic has dug Social Security’s hole deeper. They expect the program’s retirement reserves could be depleted as early as 2031 or 2032.
The gap grows
Before the pandemic, Social Security’s Board of Trustees projected that the reserves for Social Security retirement benefits would be depleted by 2034. (The reserves for disability benefits are good until 2065.)
That doesn’t mean Social Security will entirely collapse in 2034. Rather, it means that payroll taxes will be the retirement program’s only income in 2034. Without reserves to fund any gap, those taxes would cover only 76% of the program’s obligations to Social Security retirement beneficiaries.
Now, though, reports from two research institutions say that the pandemic is causing the Social Security reserves to shrink even faster than expected:
- The Committee for a Responsible Federal Budget, discussing the pandemic’s effect on government debt and deficits, gives Social Security’s trust fund for retirement benefits just 11 more years — until 2031 — to run dry.
- The Wharton School at the University of Pennsylvania projects that Social Security’s retirement trust fund could be empty as soon as 2032.
Lower U.S. birth rates
Long before the pandemic, Social Security analysts knew to expect a shortfall in funds.
Stephen C. Goss, chief actuary of the Social Security Administration, wrote in 2010 that the shortfall in funds is due to the aging of our population. It’s not that we’re living longer, however. It’s that the birth rate has fallen in the U.S.
Instead of our earlier average of three children per woman, the U.S. birth rate has dropped to two children per woman. The effect: Relatively fewer people are working and paying payroll taxes to support Social Security.
Government can fix the problem, Goss adds:
“Adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future.”
Now, unemployment from the pandemic is adding to the problem. The Wharton School researchers call out three effects of the pandemic that are making things worse for Social Security:
- Unemployment. It is especially bad among low-wage workers, the report says. Their removal from the workforce has reduced payroll tax revenue. The longer the recession runs, the worse the problem grows.
- Low interest rates. We are in a climate of very low interest rates, as the Federal Reserve lowered its benchmark rate to near zero in March. That means Social Security trust funds generate less interest.
- Low inflation. Our current prolonged low inflation has kept earnings low for workers, further reducing the payroll tax revenue Social Security depends on.
What does this mean for Social Security benefits?
If you are expecting to claim Social Security benefits in the future — and even if you are drawing benefits now — the exhaustion of Social Security’s reserves could well affect your retirement. Exactly how is unknown.
Without government action, current benefits could be reduced.
The good news is this: The problem can be fixed.
But will it be? CNBC writes:
“Fixing that would require cutting benefits, raising taxes or a combination of both.”
Raising taxes would require action from Congress. Some adjustments can be made by changing the rules for paying out benefits.
So far, any reform seems far away. Plenty of ideas for Social Security’s salvation have been floated but none appears to have gained traction.
AARP, for example, has proposed 12 ways for putting the program on its feet, along with pros and cons. Here are just a few of them:
- Raise the full retirement age. Today’s retirees are eligible for full benefits at around age 66 (depending on your birth date). Full retirement age is set to gradually move to 67 for retirees born in 1960 and sooner. Requiring retirees to wait longer to become eligible for their non-reduced benefit amount could help close the money gap.
- Increase or eliminate the payroll tax cap. Right now, workers pay Social Security taxes on earnings up to $137,700. Earnings over that ceiling aren’t taxed currently, so taxing more of workers’ take-home pay would bring more taxes to the program.
- Increase the Social Security payroll tax rate. Taxing workers and employers at a higher rate could shore up the program’s finances.
If you have a favored plan for fixing Social Security, you can work for action by joining an advocacy organization or contacting your elected representatives in Congress.