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Why Social Security's Day of Reckoning Will Be Here Sooner Than You Think

By Dan Caplinger – Jun 3, 2020 at 12:02PM

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We've seen the impact of economic recessions on the financial security of the program.

More than 60 million Americans rely on Social Security benefits today, with many of them getting most or all of their regular monthly income from the program. Hundreds of millions more expect to receive Social Security at some point during their lifetimes, and they're counting on that money being there when they need it.

Yet Social Security faces what many have called a long-term financial crisis, and unfortunately, the problems that the government program faces aren't really all that long-term anymore. With the coronavirus pandemic having sent the U.S. economy into a tailspin, economists now believe that the trust funds supporting Social Security's viability will likely run out of money even sooner than the 2035 date that they previously expected. Indeed, based on what we've seen from past economic shocks, it's entirely possible that the day of reckoning for Social Security could be several years earlier than anyone ever thought before now.

Why Social Security is sensitive to recessions

Many individuals rely on Social Security benefits to be impervious to economic conditions. Even when things are at their worst, recipients use their Social Security checks to make ends meet.

Two dice on top of a Social Security card.

Image source: Getty Images.

However, when you look beyond the individual level, the structure of Social Security makes the program economically sensitive on several fronts. The program relies on healthy job markets and wage income growth in order to finance its benefits, because the vast majority of its funding comes from payroll taxes on wages and salaries among working Americans. Employees who are out of work don't earn money and therefore don't pay those payroll taxes, and many of those who do manage to keep working face lower earnings or temporary periods of little or no job income.

On the benefit side, poor economic conditions also have an impact on Social Security. More people claim benefits earlier, which boosts the immediate amount of money the program spends. Lower wages and salaries also result in lower benefits paid to future retirees, but those offsetting impacts are often decades away. That minimizes their effectiveness in counterbalancing the negative impacts on Social Security.

We've seen this all before

This isn't the first economic downturn that we've faced, and looking back at history shows what impact a recession can have on Social Security's financial viability. In early 2008, the Social Security Trustees Report indicated that the trust funds supporting Social Security would be able to keep benefits at their scheduled amounts for all recipients until 2041. At the time, the economy had been strong for several years, and economists and market participants were optimistic about its ability to keep growing at a healthy pace over time.

By the time the 2009 report came out, however, everything had changed. The Great Recession had forced the Social Security trustees to reduce their economic outlook dramatically, leading to reduced revenue for the program. Even incorporating some of the lower benefit payout projections, the trustees moved their estimate for when Social Security's trust funds would run out of money to 2037 -- four years earlier than previously anticipated.

Could this time be even worse?

Economists agree that a coronavirus-inspired recession is likely to have similar impacts on Social Security's trust funds. The researchers behind the Penn Wharton Budget Model recently projected that even a quick V-shaped recovery for the economy could still leave the trust funds empty two years earlier than previously anticipated. A more extended period of poor economic conditions could move the date of trust fund exhaustion earlier by four years, to 2032 under its projections. Other studies have been even more pessimistic, pulling the day of reckoning into the late 2020s.

That's consistent with the margin of error built into the Trustees Report. The reported 2035 figure refers to intermediate assumptions about the economy and other variables, but under less favorable conditions, even the trustees acknowledge that their confidence range could have the funds exhausted by 2031.

At this point, it's too early to tell with any certainty what impact the economic downturn will have on Social Security. However, economists are correct to warn that the prognosis isn't great, and lawmakers will have to act sooner rather than later in order to address these impending problems in the best possible way.

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