During the coronavirus crisis, retirees will continue to get Social Security checks. The benefits are a vital source of income for millions of seniors, and payments won't be interrupted even as Social Security offices close.
But while retirees will still get their money, that doesn't mean the economic fallout of the COVID-19 pandemic won't affect Social Security at all. In fact, it could have a negative effect on future benefits for two important reasons.
1. Reduced payroll tax collection could affect Social Security's financial outlook
COVID-19 is causing record unemployment throughout the United States as companies shut their doors to comply with orders to close nonessential businesses.
With fewer people working, the government won't collect as much money in payroll taxes. These taxes, which employers cover half of, are one of the key funding sources for Social Security. The other is a trust fund with asset reserves that supplement payroll taxes when they don't generate enough money to pay benefits.
The Trump Administration has also proposed a payroll tax cut. While this hasn't yet passed, it could be included in future stimulus bills and further starve the program of funds.
The less payroll tax that's collected, the more likely it is that Social Security's trust fund could be depleted sooner. It's currently scheduled to run out of money in 2035, necessitating around a 20% cut in the promised benefit amount.
If the trust fund runs out sooner, a benefit cut could become necessary earlier unless changes are made to shore up the program, like raising payroll taxes or making workers wait longer to retire and claim their full benefits.
2. There may be no cost-of-living adjustment in 2021
The risk of a benefit cut because Social Security runs short of money is a long-term problem. But today's retirees could also be affected by the coronavirus because it may mean there's no cost-of-living adjustment (COLA) next year.
COLAs are designed to ensure beneficiaries don't lose buying power as prices rise. They're tied to the Consumer Price Index for Urban Wage Earners and Clerical workers, which measures changes in spending categories to assess the impact of inflation.
If this index shows prices holding steady, or even declining, Social Security beneficiaries won't receive an annual raise. This often happens when the country is in a major recession. In fact, following the financial crisis in 2008, there was no COLA in either 2010 or 2011. While recessions don't always mean prices for goods and services will fall, they often cause deflation.
It remains to be seen how the coronavirus will affect the economy over the next year, but economic contraction coupled with big declines in the price of oil that we've seen recently could very likely mean no COLA next year.
Strengthening Social Security remains an important priority
With Social Security keeping millions of seniors out of poverty and helping many more to lead a more comfortable life, it's essential that politicians take steps to protect this entitlement.
While changes to the retirement program are always politically difficult, the good news is that it has broad support among members of both parties, so it's likely benefit cuts won't come as lawmakers will find new ways to protect the money elderly Americans count on.