If you've been paying any attention to the news, you're no doubt aware that, despite hopes that the coronavirus pandemic in the U.S. would be brought under control by the summer, things only seem to be getting worse here. In all but a handful of states, new COVID-19 diagnoses are rising sharply, and hospitals in a host of new hot spots are being overwhelmed by critical COVID-19 cases.
For obvious reasons, all of this is awful news for the country from both the public health and macroeconomic perspectives. But you may not know why it's also bad news for Social Security.
1. Business closures could lead to higher unemployment
In April, the U.S. jobless rate reached a record 14.7%, and while that number came down in both May and June, it's still incredibly high. June's unemployment rate was 11.1%, compared to 3.5% in February, and still worse than the worst month of the Great Recession, when it hit 10.6%.
Initially, economists were hopeful that as the country opened back up, many of those lost jobs would quickly return. But now with a number of states feeling compelled to impose or reimpose restrictions in a fresh effort to stem the tide of new COVID-19 cases, we may find that many businesses will be forced to close again, leading to even more job losses.
What does this have to do with Social Security? The program gets the bulk of its funding from payroll taxes that workers and employers pay on wages. The more Americans who lose their jobs, the less revenue there will be for the nation's retirement plan. And that could lead to benefit cuts in the not-so-distant future.
Even before the pandemic hit, Social Security was on track to have a major financial shortfall fairly soon. Specifically, the program's administrators anticipated that it would in the coming years start paying out more money in benefits than it collected in revenue -- a natural result of baby boomers exiting the workforce in large numbers and too few new workers joining it to cover the added outlays. The massive Social Security Trust Funds exist to make up for such shortfalls, but the difference between revenues and benefits is expected to widen fairly rapidly. Back in April, the program's Trustees predicted that the Trust Funds would be out of money by 2035. Unless Congress acts to shore up the program's finances between now and then, at that point, benefit cuts may be inevitable.
And if unemployment stays high, or worse, rises further from these already historical levels -- a result that this extended COVID-19 surge could cause -- those benefit cuts could happen even sooner.
2. Waning consumer confidence could cut into spending
Right now, the U.S. economy is in a recession and many Americans -- not just those who are unemployed -- feel financially insecure. Throw in the ever-worsening numbers of COVID-19 diagnoses across the country, and it's understandable why many people may be spending less in the coming months -- both because they're worried about using money for discretionary purchases that they might shortly need to cover necessities, and also because if they're afraid to leave the house, they have fewer opportunities to pump money into the economy. All of this could spell disaster for current retirees who are desperate for a benefit hike in 2021.
Social Security's annual cost-of-living adjustments (COLAs) are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures price fluctuations for a basket of common goods and services. If spending declines in the coming months and the cost of those goods and services generally drops due to low demand, retirees will miss out on a 2021 COLA -- a scenario that could prove painful for some who count on those benefits for the bulk of their income.
Though it was clear early on that COVID-19 would pose a substantial health threat to Americans, the intensity of its economic impact has caught many people by surprise. Unfortunately, high unemployment is already wreaking havoc on Social Security by cutting its primary revenue stream, and if the growth in case numbers continues, the program might be in even more trouble. Unfortunately, the same holds true for the seniors who rely on it now, and any of us who plan to rely on it for a significant piece of our retirement income in the future.