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How COVID-19 Could Affect Your Future Social Security Benefits

By Katie Brockman – Apr 21, 2020 at 9:13AM

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The economic fallout from this pandemic could affect millions of retirees down the road.

The coronavirus pandemic has affected nearly every aspect of society, and there's no telling just how long it will be before life goes back to normal. It's also had a significant impact on older workers' retirement plans, and many soon-to-be retirees have watched their savings tank over the last couple of months.

The good news is that, at least for now, Social Security benefits are not affected by the fallout from COVID-19. So if you're already collecting benefits or plan to claim them within the next few years, your monthly checks likely won't change. However, there is a chance future Social Security recipients could see their benefits reduced as a result of the COVID-19 pandemic.

Social Security card

Image source: Getty Images

The future of Social Security

The Social Security program is funded by payroll taxes, meaning the taxes you pay now go toward today's retirees' Social Security benefits. When you retire, younger workers' taxes will fund your monthly checks.

However, right now the program is facing a cash shortage. With baby boomers retiring in droves and retirees living longer, there's more money flowing out of the system in benefits than coming in from taxes. To bridge this gap, the Social Security Administration (SSA) has been forced to tap its trust funds so that beneficiaries don't see their benefits reduced. But that money won't last forever, and according to the SSA Board of Trustees' latest estimate, these trust funds are expected to run out of cash by 2035.

This is concerning for those who expect to be collecting benefits around that time -- the Board of Trustees estimates that by 2035, the money coming in from taxes will only be enough to cover around 75% of projected benefits. So unless Congress raises taxes or finds some other solution before then, there's a good chance your benefits will be reduced.

How COVID-19 could affect future benefits

As if Social Security's cash shortage isn't concerning enough, COVID-19 could exacerbate this problem even more.

Approximately 22 million Americans have filed for unemployment benefits in the past month as thousands of businesses shutter due to the coronavirus pandemic. That means there are a whole lot of people who are no longer paying payroll taxes, and the SSA will need to take even more from its trust funds to avoid reducing benefits.

If the SSA dips further into its trust funds now, those funds may run dry before 2035. And if more Americans lose their jobs in the coming weeks or months, that's even less money coming in from payroll taxes.

In addition, some seniors may be forced to draw Social Security benefits earlier than they'd planned just to make ends meet. Jobs are scarce right now, and older workers who have been laid off might have no choice but to claim benefits as soon as possible, even if they had planned on waiting a few more years. If that happens, even more money will be flowing out of the system in benefits, with less cash coming in from taxes.

This wave of unemployment could also affect your future benefits in another way. Your monthly checks are calculated based on the 35 highest-earning years of your career, so if you spend a significant amount of time unemployed or are forced to retire early because of COVID-19, you are lowering your earnings potential and hurting those calculations. As a result, you could potentially receive smaller checks than if you were steadily employed during this time. Conversely, if the SSA is paying out less in benefits, the money in the trust funds might last a little longer. Whether these smaller checks will make a significant difference in how long the trust funds will last has yet to be determined, but either way, some beneficiaries will potentially receive smaller checks than they expect due to COVID-19.

What this means for future retirees

If you're planning on retiring in the next decade or so, there's a chance you'll be receiving less than you expect from Social Security unless Congress comes up with a solution before then. That means it's a good idea to make sure you won't be over-relying on your benefits in retirement.

Social Security benefits are only designed to replace around 40% of your pre-retirement income, but you may want to play it safe and assume your monthly checks will cover an even smaller portion of your retirement expenses. Do your best to beef up your retirement fund from now until you retire so that you can depend more on your savings than Social Security during your senior years.

The economy might not be in the best shape right now, but things will get better eventually. By saving consistently even when the market is down, you can build a healthier retirement account for the future. Then even if your Social Security checks are smaller than you expected, you'll still be prepared enough to enjoy a comfortable retirement.

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