COVID-19 damage to Social Security to extend beyond pandemic
COVID-19’s impact on America’s older adults is set to outlast the pandemic itself as it wreaks havoc on the Social Security retirement trust fund that millions rely on for benefits.
The nonpartisan Congressional Budget Office projects that in the aftermath of the pandemic, the trust fund will deplete its $2.8 trillion reserve over the next decade unless changes are made. Inaction would lead to cuts of 20 percent or more to benefits starting in 2031.
The decreased revenue stream stems in large part from the millions of lost jobs during the pandemic, which has led to fewer people and employers paying into the trust fund. That drop, paired with a scaling back of hours at remaining jobs, has been the biggest blow to the long-term outlook for Social Security, according to a report from the Bipartisan Policy Center (BPC).
But COVID-19 has impacted the fund in several other ways. The recession has prompted older workers to retire earlier than they previously expected, meaning they’re drawing down funds instead of contributing to them. Also, low interest rates mean smaller yields for the bonds held by the Social Security funds.
Provisions in the record $2.2 trillion CARES Act passed in March let more people dip into their retirement savings funds sooner without penalty, raising concerns among experts that many Americans in the long run will be more reliant on Social Security.
An executive order by President Trump allowing employers to defer paying into the fund for several months raised additional concerns, though it required all deferred funds be paid back in 2021, leading few to participate in the program.
Depending on how long and slow the recovery is, the trust fund could run out by the late 2020s, the BPC report said.
Even before the pandemic, Social Security finances were facing problems.
“It’s the biggest program there is, dependent on by millions and millions of people, and for decades we’ve known that we face insolvency,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a budget watchdog group.
“It’s the most-known and least-addressed policy issue for decades,” she added.
MacGuineas said there are four broad categories for potential policy fixes to stabilize Social Security: raising new revenues, reducing benefits to all or some recipients, raising the retirement age and adjusting cost of living calculations.
A fifth often-discussed policy includes increasing benefits, which would help reduce poverty among seniors, but also move the needle in the opposite direction for the program’s finances.
MacGuineas noted that most recipients remain above the poverty line, but that poverty increases dramatically among beneficiaries over the age of 85, where additional benefits could make a big difference.
Others are pushing for broader increases to benefits.
“Making sure that the program is fully financed is extremely important, but it’s a means to an end, and that end is providing economic security,” said Nancy Altman, president of Social Security Works, an advocacy group that promotes increased benefits.
“There’s no question that we can afford the program, it’s just a question of where our values are,” she said.
Several fixes have been proposed in Congress, such as the Social Security 2100 Act, sponsored by Rep. John Larson (D-Conn.), and the Social Security Expansion Act, co-sponsored by Vice President-elect Kamala Harris.
President-elect Joe Biden has his own plan, which is broadly similar to those two measures but with a few differences.
Biden’s plan would require benefits to remain 25 percent above the poverty level, give a boost to older recipients, expand survivor benefits and change the cost of living measurement.
One of his key campaign promises would limit a policy where there is already broad agreement: lifting the cap on payroll tax contributions.
Currently, workers are required to pay payroll taxes on income up to $137,700 a year. The fund would take in more cash if lawmakers would “scrap the cap,” requiring high earners to make contributions as well.
But Biden promised not to raise taxes on people earning under $400,000 a year and would likely insist on keeping that promise in any effort to overhaul Social Security.
“There does seem to be consensus about ‘scrap the cap,’ ” Altman said. “Even Tea Partiers and Republicans agree.”
MacGuineas said any plan should put off fiscal consolidation until after the economy improves. But she worries that the hyperpartisan political environment, which has managed to delay another COVID-19 relief package, could derail those efforts.
“It’s a politically difficult issue in a moment of take-no-prisoners politics, so it’ll be difficult to put together a package,” she said.
But whereas previous alarms about the trust fund had warned of a crisis far off in the future, the situation has gotten to a point that current beneficiaries could see their benefits reduced in the coming years.
“Current seniors would probably fare better under most reform packages than they would if the trust fund were to run out,” she said. “Seniors should be concerned about a do-nothing approach.”