There's no question that the coronavirus disease 2019 (COVID-19) is affecting us all. As of last week, more than 1.1 million cases of this respiratory illness had been reported worldwide, leading to over 58,000 deaths. But what's truly scary is that 1 in 4 confirmed coronavirus cases has originated within the United States.

To help flatten the curve and ensure that our healthcare system doesn't become overwhelmed, stringent mitigation measures have put into place in a number of major states and cities across the United States. While necessary to slow the infection rate, this near-halt of nonessential economic activity is expected to do untold damage to the economy.

An up-close view of a woman wearing a face mask.

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COVID-19 could hit Social Security hard

But it's not just the broader economy that could struggle. Our nation's more storied social program, Social Security, could be facing its ugliest year since its inception almost 85 years ago. In fact, if the coronavirus pandemic infection rate doesn't flatten out as quickly as planned, it could wind up costing Social Security more than $100 billion in 2020.

As some of you may be aware, Social Security has three sources of funding:

  • The 12.4% payroll tax on earned income (wages and salary, but not investment income) ranging between $0.01 and $137,700, as of 2020.
  • The taxation of Social Security benefits, which is applicable to any individual receiving benefits with over $25,000 in modified adjusted gross income, plus one-half of benefits ($32,000 for couples filing jointly).
  • The interest income earned on its nearly $2.9 trillion in asset reserves. These "asset reserves" are the program's net cash surpluses built up since inception, and they're required by law to be invested in special-issue bonds, and to a lesser extent certificates of indebtedness.

These last two sources -- the taxation of benefits and interest income -- accounted for a respective $35 billion and $83 billion in collected income in 2018. Comparatively, the payroll tax supplied $885 billion of the $1 trillion collected in 2018. It is, by far, Social Security's revenue-generating workhorse.

A young woman who's been laid off holds a box of her possessions.

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Skyrocketing unemployment figures may lead to a jaw-dropping net cash outflow for Social Security

However, to collect payroll tax, it's imperative that the American public remains employed. That's not necessarily the case right now, with approximately 10 million people filing initial jobless claims over a two-week stretch to end March. For context, at no time in history had we seen a two-week stretch where jobless claims topped 1.4 million, dating back many decades. If Americans aren't generating income, then Social Security's payroll tax can't bring in revenue for the program -- it's that simple.

What's more, unemployment benefits and stimulus check money don't qualify as earned income. Though that's probably a good thing for those receiving this income, it puts Social Security into a deep bind.

According to the 2019 report from the Social Security Board of Trustees, an estimated $1.11 trillion was expected to be collected in 2020, with $988 billion of this being derived from the payroll tax. Obviously, the Trustees could not have foreseen the unprecedented challenges that the U.S. economy would face in the wake of the coronavirus pandemic. But assuming we see income disruption accelerate from mid-March onward, it wouldn't take much to balloon the $4.3 billion net cash outflow expected in 2020. 

By my calculation, it would only take a 12% reduction in payroll tax collection from mid-March until the end of 2020 for Social Security to "lose" $100 billion from its asset reserves this year. With economists at the St. Louis Federal Reserve projecting a 47 million-person reduction in employment, and the unemployment rate spiking to as much as 32% in the near-term, a net cash outflow of $100 billion or more from Social Security becomes very feasible. 

Two red dice next to a piece of paper that reads, Will Your Social Security Be Enough?

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The coronavirus is a big-time threat to Social Security's long-term outlook

However, it's important to realize that even a $100 billion net cash outflow from Social Security in 2020 isn't going to jeopardize the ability of the program to pay its beneficiaries. If you're currently receiving a monthly benefit check, or you expect to begin taking your Social Security retirement benefit soon, you will receive the full amount you're due.

In fact, this is a great time to point out that, because the payroll tax and taxation of benefits are recurring sources of revenue, Social Security can't go bankrupt. No matter when you retire, you'll be receiving a Social Security benefit check, assuming you've met the requisite 40 work credits to receive a payout.

But the coronavirus pandemic may severely dent Social Security's longer-term outlook.

You see, the Trustees have projected that Social Security's nearly $2.9 trillion in asset reserves could be completely exhausted by 2035. The Trustees expected a relatively small $4.3 billion net cash outflow in 2020, with these outflows significantly growing in size with each subsequent year. If COVID-19 winds up pushing close to 1 in 3 laborers out of work in the worst-case scenario, the expected asset reserve depletion date may come sooner than expected.

If Social Security's close to $2.9 trillion in asset reserves is whittled down to $0, it (again) doesn't mean the program is bankrupt. But it would unequivocally signal that the existing payout schedule isn't sustainable. In short, it would lead to across-the-board benefit cuts for then-current and future beneficiaries. The Trustees pegged these cuts at up to 23% for retired workers, but it could be even higher following the coronavirus crisis.

There's no question in my mind that COVID-19 is a big-time threat to Social Security's long-term outlook.