Social Security is easily our nation's most important social program. It's been making continuous monthly payments to a growing lot of eligible retired workers for more than 80 years, and is directly responsible for pulling more than 22 million people out of poverty, according to an analysis from the Center on Budget and Policy Priorities.

It's also a program that many folks lean on, probably more than they should. While the Social Security Administration cautions that the average worker will see 40% of their wages or salary replaced by the program during retirement, data shows that 62% of retired workers lean on their monthly payout for at least half of their income.

These statistics make what I'm about to say incredibly worrisome: Social Security is officially in trouble.

A man on a crowded subway train wearing a surgical face mask.

Image source: Getty Images.

This was already supposed to be an inflection year for Social Security

Now, the idea of Social Security not being on the best financial footing isn't something new. The Social Security Board of Trustees has been warning lawmakers since 1985 that there wouldn't be enough revenue generated over the long term (defined as the next 75 years from the date of an issued report) to cover the program's outgoing expenses.

In other words, the Trustees have been predicting that a net cash outflow would eventually deplete the $2.9 trillion in Social Security's asset reserves -- i.e., its annual net cash surpluses built up since inception. If the program's asset reserves disappear, a benefit cut of up to 23% could await retired workers.

According to the 2019 Trustees report, the Social Security program was on track to do something in 2020 that it hadn't done since 1982. Namely, it's on pace to expend just a little more than it's estimated to collect. Over time, these net cash outflows are expected to grow in size, leading to the noted depletion of Social Security's asset reserves by 2035.

The problem is that the spread of coronavirus disease 2019 (COVID-19) is about to make Social Security's financial situation a lot worse than the Trustees' forecast.

Two Social Security cards laid atop a W2 highlighting payroll taxes paid.

Image source: Getty Images.

Social Security's net cash outflow in 2020 will almost certainly be its highest in history

As you're likely aware, the number of confirmed cases and deaths associated with this novel coronavirus have been climbing in the U.S. and a number of countries abroad, such as Italy and Iran. The stringent mitigation measures that are being implemented to flatten the curve of COVID-19's spread are absolutely necessary to ensure that healthcare systems don't become overwhelmed. Unfortunately, these mitigating factors have also ground economic activity to a halt in many key U.S. markets, and that's not good for Social Security.

You see, Social Security generates revenue three ways:

  • Payroll tax: A 12.4% payroll tax is applicable to earned income (wages and salaries but not investment income) between $0.01 and $137,700, as of 2020.
  • Interest income: Social Security's $2.9 trillion in asset reserves are invested in special-issue bonds and certificates of indebtedness that pay interest.
  • Taxation of benefits: Beneficiaries whose modified adjusted gross income plus one-half of benefits exceeds $25,000 (or $32,000 for couples filing jointly) will owe at least some tax to the federal government on their Social Security benefits.

These latter two sources of funding -- interest income and the taxation of benefits -- only amounted to $83 billion and $35 billion in respective collected revenue in 2018. By comparison, the payroll tax was Social Security's workhorse, generating $885 billion of the $1 trillion collected.

If economic activity grinds to a halt, save for those workers who can operate at home, the amount of payroll tax being collected will decline substantially. Thus, the $4.3 billion in net cash outflow the Trustees report predicted for 2020 could turn out to be nowhere near reality. With a $5.3 billion net cash outflow in 1977 being the largest in the history of Social Security, the coronavirus crisis looks as if it'll blow this figure out of the water. 

A senior man seated on a couch with an open laptop on his lap.

Image source: Getty Images.

It's a good news/bad news scenario for Social Security

If there is a silver lining to be pulled from this dreary situation we're in, it's that no matter how dire things may look for the U.S. economy in the short term, Social Security is incapable of going bankrupt. Although it could exhaust its asset reserves and therefore lose its ability to generate interest income, the payroll tax and taxation of benefits are two recurring sources of income that ensure money is always flowing into the program for disbursement to eligible beneficiaries. I repeat, you will be getting a Social Security benefit if you qualify for one, no matter when you plan to begin taking benefits.

However, the bad news here is that coronavirus may further shorten the window before Social Security burns through its remaining asset reserves. The 2019 Trustees report pinpointed 2035 as the depletion date, but it could come even sooner if Social Security's net cash outflows explode higher in 2020.

While it is possible that Social Security's worst year in history might be the kick in the pants that lawmakers from both parties need to come together and create a bipartisan fix, the immediate economic issues being caused by coronavirus are likely to take precedence. Thus, with no immediate fix on the horizon and Social Security likely to worsen from a financial standpoint in 2020, expect worries regarding the program to reach new heights.