The Covid-19 recession risks draining the Social Security Trust Fund one to five years earlier than its trustees had projected, says a new study from the Bipartisan Policy Center, a Washington-based think tank.
The trustees had estimated the retirement fund would run out of money in 2034, which was estimated to lead in cuts to checks seniors receive by roughly 25 percent.
The depletion of the disability fund reserves, earlier seen at 2065 by the trustees, could now happen as early as 2023 or 2024 with 2054 the most optimistic date calculated by the report’s authors, BPC Economic Policy Director Shai Akabas and Economic Policy Analyst Nicko Gladstone.
“The timing of trust fund depletion will ultimately depend on the depth and duration of this recession’s toll on the labor market, which remains uncertain,” say Akabas and Gladstone.
The two say the trust funds have been put in danger earlier as all three revenue sources for Social Security have been threatened by the current recession —payroll taxes, taxes on Social Security benefits and interest earned on U.S. Treasury securities held by the trust funds.
Payroll taxes are not only being hurt by the millions of adults who have stopped paying them because they have been laid off during the Covid-19 recession but also from decline in contributions from the many workers who have had their hours cut and a slack job market that slows the growth in wages that could have provided more revenue to the system, the report explains.
Trust fund revenues have also been hurt by a cut in the number of Social Security recipients meeting the income thresholds for paying taxes on benefits ($25,000 for an individual and $32,000 for a couple filing jointly). In addition, income into the trust funds has been dampened by the reduction in amounts over those figures that can be taxed.
“Finally, the Federal Reserve has responded to the crisis by cutting interest rates, which will lower yields on bonds held by the Social Security trust funds,” the report goes on to say.
Even before the Covid-19 recession, the authors say the trustees said the trust funds were endangered by demographic and economic trends—especially the aging of the population—that would produce a long-term mismatch between revenues and costs.
Akabas and Gladstone came up with four different stress tests for their range of possible depletion dates based on factors including the timing and rebound along with the possibility of another great recession in the aftermath of the 2008 downturn.
They point out the disability trust fund is significantly more sensitive to rises in the economy and declines from recessions than the retirement money pool because its trust fund reserves are much smaller relative to both its revenue and costs.
The report does not anticipate inflation from the current recession having an impact on the depletion dates.
The full 25-page report: