Please ensure Javascript is enabled for purposes of website accessibility

Will COVID-19 Bring Social Security Closer to Insolvency?

By Maurie Backman – Apr 28, 2020 at 8:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The crisis is already hurting Social Security, and that could spell trouble in the long run.

Social Security is a critical income source for millions of retired seniors. But the program is facing some serious financial shortcomings that may force it to cut benefits in the not-so-distant future. As per the latest Trustees Report, those cuts may be implemented as early as 2035 if lawmakers don't manage to intervene with a fix. But thanks to COVID-19, that unwanted milestone may arrive even sooner.

How COVID-19 is hurting Social Security

Social Security has a few different sources of revenue:

Of these sources, payroll taxes are the program's most substantial revenue stream. Currently, workers pay taxes on up to $137,700 of income. In previous years, that threshold has been lower.

Four Social Security cards

IMAGE SOURCE: GETTY IMAGES.

Here's the problem: The COVID-19 crisis has forced millions of Americans into unemployment. That means those workers are no longer on an employer's payroll, which means the payroll taxes that would normally filter to Social Security are not, in fact, being paid.

Now you may be thinking: What about unemployment benefits? Aren't those taxable?

But while unemployment benefits are subject to federal taxes, they're exempt from the payroll taxes that fund Social Security. And, in many cases, they're less generous than workers' regular paychecks. As such, the program is already losing out on a key source of income, and the longer the COVID-19 crisis drags on, the more of a hit Social Security is apt to take.

Will COVID-19 push up the date of benefit cuts?

As of now, Social Security is expected to deplete its trust funds in 2035, which is why that's the year benefit cuts are anticipated. Those trust funds are Social Security's savings account of sorts, and they can be used to bridge the gap that ensues when scheduled benefits exceed incoming revenue -- a scenario that's expected in the coming years as more and more baby boomers exit the workforce and not enough replacement workers enter it. But if the COVID-19 crisis drags on for many more months, and workers remain unemployed by the millions, then Social Security may need to rely more heavily on its trust funds sooner, thereby accelerating that depletion date and forcing earlier benefit cuts than anyone wants.

Is Social Security doomed?

To be clear, Social Security is not in danger of running out of money. Even if it's not collecting the same amount of payroll tax revenue as normal, there are plenty of Americans who are still working and getting their paychecks taxed. But advocates have warned for years that seniors face future benefit cuts if lawmakers don't intervene and fashion a solution for the program's projected shortfall, and currently, there are no foolproof solutions on the table.

Right now, everyone is focused on helping the country cope with the economic impact of COVID-19. But at some point soon, lawmakers will need to focus their attention on Social Security to prevent what could be a catastrophic reduction in benefits -- one that may now happen even sooner than expected.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.