Social Security's importance to the financial well-being of seniors simply cannot be overstated. Although the average monthly payout to the more than 45 million retired workers receiving a benefit check is only $1,509, this is enough to pull over 15 million retirees out of poverty. In total, more than 22 million Social Security beneficiaries (including survivors and the long-term disabled) are singlehandedly lifted out of poverty every year because of their guaranteed payouts from the program.
But according to the newly released Social Security Board of Trustees report for 2020, Social Security finds itself in a $16.8 trillion hole over the long run.
Social Security benefit cuts may be only 15 years away
For the past 35 years (yes, 35!), the annual Trustees report has cautioned Congress that long-term revenue collection would be insufficient to continue paying benefits, inclusive of cost-of-living adjustments, at the existing payout schedule. By "long-term," the Trustees are referencing the 75 years following the release of a report.
Due to a number of ongoing demographic changes including increased longevity, rising income inequality, lower birth rates, and declining net immigration, the Trustees foresee Social Security completely depleting its nearly $2.9 trillion in asset reserves (i.e., net cash surpluses built up since inception) by 2035. If lawmakers fail to act quickly and allow the program's asset reserves to be exhausted, the expectation is that retired workers, survivors, and future retirees would see a 24% across-the-board cut to benefits in 15 years.
In total, the new report finds that there will be a $16.8 trillion cash shortfall, based on the existing payout schedule, between 2035 and 2094.
Sorry folks, but this Social Security projection for 2020 is wrong
Though these projections from the Trustees are nothing more than estimates based on an always-changing sea of variables, one of the forecasts offered in the latest report is, to put it mildly, going to be way off.
In the 2019 report, the Trustees opined that Social Security would suffer its first net cash outflow since 1982 in 2020. But in the newly released 2020 report, the Board now expects a $4.4 billion net cash surplus in 2020, followed by a $21.1 billion net cash outflow in 2021. In other words, the Trustees expect Social Security's inflection point to be pushed out another year. But here's why this is so, so wrong.
In prefacing the report, the Trustees clearly state that they've not taken into account the economic impacts of the coronavirus disease 2019 (COVID-19) on Social Security in the short or long run. This has to do with the outlook of COVID-19 still being largely unknown and many variables of the report likely being calculated weeks or months before the coronavirus became a serious problem in the United States. Suffice it to say, 276-page reports don't write themselves overnight.
But there's very clearly going to be a negative impact on Social Security from the coronavirus. In a four-week span, more than 26 million people have filed for initial unemployment benefits, with no definitive time frame as to how long they'll be out of work. That's bad news for Social Security, given that nearly 89% of the $1.06 trillion in revenue collected in 2019 was derived from the 12.4% payroll tax on earned income (wages and salary, but not investment income). If people aren't generating earned income -- unemployment benefits are exempt from the payroll tax -- Social Security's revenue collection goes down the tubes very quickly.
In order to have met the Trustees' forecast in 2020, the U.S. economy probably needed to grow at 2% or more for the year. But with the unemployment rate all but certain to top 15% in April, it wouldn't be surprising if Social Security suffered a $100 billion or greater net cash outflow this year.
Make no mistake about it: COVID-19 has forced Social Security into its inflection point in 2020.
The coronavirus could create longer-term chaos for Social Security
But it's not just the short-term outlook that the coronavirus will impact. There could be serious longer-term implications to COVID-19 on Social Security.
Before diving into those implications, it's imperative to note that the coronavirus will have absolutely no impact on the Social Security Administration's ability to send benefits to its 64 million-plus beneficiaries, nor will it bankrupt the Social Security program. In fact, thanks to the aforementioned payroll tax and the taxation of benefits being recurring sources of revenue, Social Security can't go bankrupt.
With that out of the way, let's dig into the possible longer-term implications of COVID-19 on Social Security.
First of all, the growing likelihood of a huge net cash outflow in 2020 is going to require the Trustees to reassess the program's asset reserve depletion date next year, when more is known about the coronavirus. I tossed out the possibility of a $100 billion outflow in 2020, but this figure could be even higher depending on how long it takes for businesses to reopen and whether or not we see a resurfacing of COVID-19 in the fall or winter months. It's very possible the program's asset reserve depletion date has been pushed forward because of the coronavirus.
Another potential issue is the slowdown in net immigration into the United States. The Social Security program counts on a healthy inflow of new immigrants every year, given that migrants tend to be younger and are therefore inclined to spend decades in the labor force generating payroll tax revenue. If the U.S. removes its welcome mat for legal immigrants, it could have disastrous impacts on future revenue collection for Social Security.
The COVID-19 impact on birth rates is also in question. Birth rates per woman are at their lowest level in history, and it's possible that the biggest economic disruption since the Great Depression could coerce couples to hold off even further on having kids. A persistently low birth rate may threaten to lower the worker-to-beneficiary ratio even further.
Even if the coronavirus winds up being a relatively short-term disease, it's going to have a lasting impact on Social Security that the Trustees report hasn't yet accounted for.