Social Security is in a tough spot financially right now. In the coming years, it expects to owe more money in benefits than it collects in revenue, due to the anticipated mass exodus of baby boomers from the workforce. While replacement workers will be coming to generate payroll tax revenue, which is Social Security's primary source of funding, that projected income won't suffice in bridging the aforementioned gap.
Thankfully, Social Security has trust funds it can tap to keep up with scheduled benefits when its expenses exceed its revenue. Those trust funds function as a savings account of sorts, but they're not unlimited, and back in April, the program's Trustees reported that they're likely to run out of money by 2035. At that point, Social Security may have no choice but to implement widespread benefits cuts in the absence of ample revenue.
But the COVID-19 crisis could make Social Security's financial situation even worse. And that's a possibility current and future beneficiaries need to gear up for.
COVID-19 is hurting Social Security
COVID-19 has forced millions of Americans into unemployment since March, and that's already deprived Social Security of a large chunk of payroll tax revenue. If current conditions persist well into the future and double-digit unemployment holds steady, Social Security will continue to miss out on the income it desperately needs to stay afloat.
The result? The program's trust funds could run out of money up to four years faster than its Trustees initially predicted, according to new research from the Penn Wharton Budget Model.
Of course, it's not just unemployment that's hurting Social Security. Older workers are being forced into early retirement due to late-in-life layoffs. As such, seniors may start claiming their benefits much sooner than expected.
Furthermore, those impacted by job loss may struggle to get back into the workforce once things improve and accept lower-paying jobs as a result. That, too, could lead to less payroll tax revenue.
To be clear, none of this is meant to imply that Social Security is in danger of running out of money altogether. While many Americans are out of work, the program still has money coming in. But if Social Security's trust funds are depleted sooner than expected, benefit cuts will also be pushed up -- that is, unless lawmakers intervene and figure out a way around that.
What does this mean for current and future beneficiaries? Those who are still working should ramp up their savings efforts to compensate for the possibility of lower benefits in retirement. Those who are already on Social Security can map out a plan for cutting expenses, though it's worth noting that some seniors in that situation are already living extremely modest lifestyles and may not have much wiggle room in their budgets.
Thankfully, the upside of COVID-19, if we want to look at it that way, is that workers and retirees alike are now in a position to spend less, as many people aren't going out, taking vacations, or attending big events (which are, for the most part, canceled anyway). As such, anyone who's worried about future benefit cuts can attempt to bank some money today.
Still, that really only works for people who haven't seen a drop in income due to COVID-19. The others are the ones who may get the worst of both worlds -- an immediate financial hardship and a lower benefit once retirement rolls around.