Coronavirus has led to unprecedented job losses and has left many workers with reduced hours and less income. But it's not just those who are still in the workforce who could see their finances damaged by COVID-19. Those who are receiving Social Security could also see long-term damage to their financial situation.
For half of married couples and 70% of unmarried persons, Social Security benefits provide at least half of household income. And these benefits account for 90% or more of available funds for 21% of married couples and 45% of unmarried persons. Unfortunately, this essential source of income could be adversely affected by coronavirus in two key ways.
1. Coronavirus could result in a reduced cost of living adjustment
Retirees generally see their benefits go up a small percentage in most years, thanks to increasing prices. The increase is called a Cost of Living Adjustment (COLA) and it's calculated based on changes to a consumer price index called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
But seniors don't get a COLA every year and some years, they get very small ones. This can happen when CPI-W doesn't show prices going up. In 2009, 2010, and 2015, deflation meant prices actually went down so there was no COLA (fortunately, benefits don't decline in these situations -- they just stay the same). And in 2016, the year-over-year price increases were so slight, seniors saw just a 0.3% adjustment to their benefits.
Thanks to the coronavirus, it's very likely that for Social Security beneficiaries, history will probably repeat itself and retirees will see either a small cost of living adjustment next year or no COLA at all. In fact, early data from the Bureau of Labor Statistics suggests this highly anticipated raise may be half the amount of last year's and total only around 0.8%.
With average Social Security benefits totaling just $1,503 per month in 2020, every little bit counts -- and many experts believe CPI-W isn't the best measure of the inflation on things seniors actually spend most of their money on. If a small raise accelerates the loss in buying power beneficiaries are experiencing, seniors could find themselves pinching pennies next year. And since all future raises are based on a percentage of benefits, a small raise in one year has a ripple effect that will be felt for years to come.
2. It could also lead to benefit cuts earlier than anticipated
Most retirees likely know that Social Security is in financial trouble. The program has a trust fund that helps cover benefits, and projections have long shown that fund will be running out soon.
While the most recent report from the Social Security trustees found the combined trust funds for Social Security retirement and disability funds would be empty in 2035, the coronavirus pandemic will probably accelerate its depletion. In fact, since less payroll taxes are being collected, research from the Bipartisan Policy Center revealed the fund could run dry as soon as 2028.
If the trust fund runs out of money, Social Security will only be able to pay out benefits from the income it brings in from payroll taxes and taxes on the benefits of high earners. This is enough to pay out around 76% of promised retirement benefits. Sadly, that would leave retirees looking at a 24% benefit cut if lawmakers don't take some action to shore up the program's funding.
With so much political turmoil going on right now, it's highly unlikely Congress wants to add a fight over Social Security funding to their to-do list -- especially with an election coming up. But the longer lawmakers wait to act, the harder it gets to fix the funding shortfall. Sadly, the political difficulties involved in finding a fix mean current and future beneficiaries need to resign themselves to a benefits cut happening sooner rather than later due to COVID-19.
Be prepared for the impact of coronavirus on Social Security
Whether you're receiving Social Security benefits now or will rely on them in the future, the damage COVID-19 could do to your finances should be a source of concern.
If you're still working now, upping your retirement investing is a good idea to ensure you have a big enough nest egg to provide plenty of income to supplement Social Security. And if you're already retired, pay attention to possible cuts to your buying power or your benefits, so you can adjust your budget accordingly and ensure you're still able to live within your means.
Planning for a future in which Social Security benefits are a little smaller may not seem fun, but it's worth doing so you aren't caught unaware and left facing more severe financial damage because of it.