One of the biggest concerns among soon-to-be retirees, as well as those who have already retired, is will their money last? Many millions of Americans rely on Social Security as part of their retirement income. This valuable retirement income source is facing pressure under the weight of the Coronavirus pandemic. Will Social Security be able to survive the COVID-19 recession?
For those in higher-income tax brackets, Social Security many not represent a significant part of their retirement income plan or net worth. On the flip side, Social Security is the main, and in many cases, the only source of retirement income for a large number of American seniors. The Social Security Administration is expected to pay around $1 trillion in benefits in 2020, with the average Social Security benefit hovering around $1,503 per month. At the same time, the maximum Social Security benefit at full retirement age is $3,011 per month, also for this year.
People’s longevity, a declining birth rate, as well as limits on immigration, put financial pressure on the Social Security trust fund, even before the pandemic hit. Now, the question of how long the Social Security trust will last has become even more pressing.
The pandemic and its effect on the economy could hasten the insolvency of the Social Security trust fund. As recently as April 2020, the Social Security Administration stated that the trust funds could be depleted by the year 2035. At that point, it is expected that the Social Security system would only be able to pay out 79% of promised benefits. The remaining 21% percent of the benefit would be paid by the current payroll taxes of employees and employers.
However, I do need to point out that this research was done before the pandemic really set in. As the effects of the Coronavirus have worsened, the estimates have grown more pessimistic. With 50 million Americans applying for unemployment benefits, that is a large portion of the workforce that is not paying into the Social Security trust fund. In June, the Committee for a Responsible Federal Budget said the Social trust fund could run dry as early as 2031.
To put this in perspective, someone who retires today, at 67, will be just 78 when the trust fund potentially runs out of money in 2031. When working on a financial plan for my younger clients, I typically try to avoid relying heavily on Social Security benefits. This allows flexibility down the road if there are changes to the program or if the client needs to retire early. Currently, the full retirement age for Social Security is 67, while the average retirement age is closer to 62. Additionally, I expect many people, who are near retirement to retire earlier than expected thanks in part to the Coronavirus pandemic. Some may have trouble finding work; others may just not want to risk their health for a paycheck.
If the calculations change for Social Security, younger workers will have more time to adjust their retirement plans. However, any adjustment to benefits for those already retired could be devastating. This is a program we need to save more for our grandparents and parents than our grandchildren.
Social Security and the 2020 Presidential Election
To ensure the continued health of Social Security, lawmakers have a few options. The three main levers they have to pull are changing the expected retirement ages, raising Social Security taxes, cutting benefits, or a combination of all three. Joe Biden has called for expanding Social Security benefits, as well as announcing a $775 billion plan to make childcare and eldercare more affordable.
Trump, on the other hand, has been fighting for a payroll tax holiday. Luckily, Donald Trump has been stifled on this plan. While I would love to no longer have to make payroll tax payments (resulting in a higher take home pay today), it would be another nail in the coffin of Social Security. Your payroll taxes are what fund the Social Security trust fund. Without payroll taxes coming in, Social Security would go broke faster.
While we know Trump has been hostile to the Affordable Care Act, he is also looking to cut retirees’ Medicare benefits. According to Trump’s proposed 2021 budget, we are looking at $500 billion in net Medicare spending over the next decade.
The Value of Social Security Benefits
Social Security benefits are technically indexed for inflation. How those adjustments are calculated doesn’t always line up with the actual expense retirees face. Partly due to inflation, Social Security benefits have lost around 30% of their purchasing power since the year 2000. Over the past decade, we have seen three years without a Social Security Cost of Living Adjustment (COLA). It won’t be surprising to see another 0% COLA, for 2021, based on the decreased prices in spending due to the Coronavirus. Social Security recipients received a 1.6% COLA for 2020.
All is not lost for Social Security benefits. This popular benefit is not going away. Younger workers will have time to adjust retirement plans based on any adjustment that may come from Washington. Take advantage of tax-free income sources, like the Roth IRA, as taxes will likely be higher at some point in the future. Make sure you are saving enough money now to fully fund your retirement, and let Social Security be the icing on the retirement income cake.
I find it hard to believe that politicians would allow the benefits, of those already retired, to be cut by 21%. Of course, to maintain current benefit projection, more money will need to be coming into the Social Security trust fund. Hopefully, the White House, Congress, and Senate will act sooner rather than later. The more they procrastinate, the more limited their options will be to secure your Social Security benefits. Make sure to vote in November as if your retirement depends on it. It just might.